Overview: The dollar remains largely confined
to its recent ranges as the consolidative phase extends. The Bank of Japan
stood pat and revised its forecasts as it is seen drawing closer another
adjustment in policy, with the market still favoring an April timeframe. A
squeeze in the Hong Kong money market and talk of a large package to support
the equity market helped lift the Chinese yuan for the third consecutive
session and lifted Chinese stocks. Most emerging market currencies, led by the
Mexican peso again, softer today. A handful of Asian currencies and the South
African rand are resisting the firmer greenback.
Although Japanese stocks saw some
profit-taking, the other large markets in the region rose helped by China and
the rally in the US yesterday that saw new S&P 500 and Nasdaq 100
record-highs. Europe's Stoxx 60 is off about 0.2% after rallying about 0.75%
yesterday. US index futures are trading with a slightly lower bias. US and
European 10-year yields are 1-3 bp firmer, which puts the 10-year Treasury near
4.13%. The 10-year JGB yield edged up to almost 0.66%. Gold remains in a
$2015-$2040 range that has recently been carved. March WTI posted an outside up
day yesterday, trading on both sides of Friday's range and closing above its
high. However, there has been no follow-through buying, which leaves the crude
oil contract still chopping in a $70-$75 range.
Asia Pacific
As widely anticipated, the Bank of Japan
stood pat. Nor is it
expected to change policy at its next meeting in late March, though this cannot
be entirely ruled out. However, an exit from its zero-interest rate policy is
seen most likely in April. Ironically, at the end of this week, Tokyo's core
CPI is expected to slip below 2% from the first time since May 2022. Tokyo's
CPI is a good barometer of the national CPI but is slightly lower. That means
that the national core reading could fall below the BOJ's 2% target in February
or March.
The Bank of Japan updated its economic
forecasts. Growth in
the current fiscal year, which is ending in March, was shaved to 1.8% from 2.0%
and GDP in the next fiscal year it was raised to 1.2% from 1.0% and in FY25,
the growth forecast was left unchanged at 1.0%. The core CPI forecast was
unchanged at 2.8% for the current fiscal year, and reduced to 2.4% (from 2.,8%)
for FY24 and was seen at 1.8% in FY25 (from 1.7%). The BOJ seemed more that the
economy is moving in the first direction. The first thing tomorrow, Japan
reports its December merchandise trade balance, which will confirm the third
consecutive annual deficit. The 2023 deficit appears to be around half the
magnitude of the 2022 shortfall. Also tomorrow, Japan (and Australia) will see
the flash January PMI. Except for the November weakness, Japan's composite PMI
held above the 50 boom/bust levels even in Q3 when GDP contracted. Australia's
composite PMI remained below 50 throughout Q4. In fact, it averaged 46.9 in Q4
23, the weakest quarterly reading since Q3 21 (45). Still, Australia's economy
expanded by 0.2% in Q3 23 and is expected to have matched in in Q4 23.
The dollar was little changed yesterday
for the third consecutive session. The surge at the start of last week had given way to narrow range
trading. The BOJ injected a bit of volatility and the dollar fell to a five-day
low near JPY147 before it recovered to back to JPY148. Immediate resistance is
seen near JPY148.20. The price action seems to favor a continuation pattern,
which warns an upside breakout for the dollar. Yet, given how far the dollar
has come in the last three weeks, and stretched momentum indicators, this leg
up we envision may be the last before a more meaningful push lower. The
Australian dollar settled poorly after reversing lower from a three-day high
early Monday near $0.6615. It recorded the session low in late North
American turnover slightly below $0.6570. It has largely been confined to that
range today. It looks set to $0.6615 and a push through it could see a move
toward $0.6640-50. A liquidity squeeze in Hong Kong and talk of a CNY2
trillion (~$278 bln). packaged to support the stock market helped lift the yuan
today. The Hong Kong interbank rate rose (by 55 bp to 5.50%, the highest
since last April). The PBOC set the dollar's reference rate at CNY7.1117
(CNY7.1105 yesterday) compared with the average in Bloomberg's survey of
CNY7.2008 (CNY7.1873). The dollar held below its recent gap near CNY7.20 and
fell to CNY7.1635, its lowest since January 12. It is the third consecutive
session the dollar is trading heavier and the 0.3% decline is the largest this
month.
Europe
Tomorrow sees the eurozone and UK
preliminary January PMI followed by the ECB and Norges Bank meetings on
Thursday. The
eurozone and UK economies are stagnant for all practical purposes. The eurozone
composite PMI has been below 50 since last June and seemed to have bottomed in
46.5 in October but the upside has been unimpressive. It finished last year at
47.6 compared with 49.3 at the end of 2022. The manufacturing PMI put in a low
at 42.7 in July and finished 2023 at 44.4. The service PMI bottomed in October
at 47.8 and it ended the year at 49.0. The UK's composite PMI finished 2023 on
a firm note at 52.1, the best in H2 23. Services continue to expand, and the
services PMI was at 53.4 in December, the highest since June. The manufacturing
PMI slipped 46.2, in December, its first decline in four months. It bottomed in
August at 43.
The euro spent yesterday in a little more
than a quarter-cent range above $1.0880. It made a marginal near five-day high near
$1.0915 today but could not sustain the mild upside momentum and retreated to
around $1.0880 in the European morning. We suspect it may find support around
here and continue to broadly consolidate. Yet, we have not given the up the
idea that correction to the Oct-Dec 2023 may not be over. Sterling is
holding up better and firmed to a new six-day high near $1.2750. While
sterling can try again for the upper end of its two-cent range around
$1.2800, we are wary of a false break ahead of next week BOE meeting and the US
employment data.
America
The Philadelphia Fed's non-manufacturing
survey and the Richmond Fed's surveys are unlikely to have much impact ahead of
the Wednesday's flash PMI, Thursday's Q4 GDP, and Friday's personal, income,
and deflator data. Of
note, the Empire State for January imploded, while the Philadelphia Fed
manufacturing survey ticked up. Economists expected a sharp slowing in Q1 GDP
but may have to revise up as the quarter progresses as it has with Q4 23 GDP.
Note that the early call for January nonfarm payrolls is for about 155k. Jobs
growth is slowing, but seemingly gradually. Also, Q4 23 GDP looks to be
slightly above trend growth (the Fed estimates long-term non-inflation growth
pace is 1.8%). The personal income and consumption data for December will be
embedded into the GDP estimate. The monthly deflator is expected to be
unchanged at 2.6%, while the core rate may slip to 3.0% from 3.2%.
The US dollar recouped half of the losses seen since last Wednesday's high near CAD1.3540. It initially saw those losses extended into activity yesterday to new four-day low near CAD1.3415 and reversed higher, despite the rise in US equities (risk-on) and the surge in oil (many still see the Canadian dollar as a petro-currency but find little statistical evidence). The CAD1.3500 area may offer initial resistance but last week's high near CAD1.3540 is more important. Above there, last month's highs in the CAD1.3600-20 area would be the next technical target. The US dollar traded on both sides of last Friday's range against the Mexican peso but failed to close above its high. Still, the bullish implications were clear, and the dollar has extended its gains toward MXN17.2840. The move above the MXN17.26 area targets the 200-day moving average and this month's high in the MXN17.3650-MXN17.3850 area. Last month's high was slightly above MXN17.5650.The greenback jumped even more against the Brazilian real, to reach its best level since early November of (~BRL5.0). The dollar faces an initial hurdle near BRL5.01, but a break of it could signal another 1% near-term gain.
Reviewed by Marc Chandler
on
January 23, 2024
Rating:
