Overview: This week's dollar surge is consolidating
today. Interest rates have steadied, but the adjustment, which involves pushing
the first rate from March toward June does not appear complete. This suggests
the dollar's recovery from last November-December's sell-off may not be
complete either. Today, though, it is a little firmer against all the G10
currencies but the Swiss franc. Most emerging market currencies are also
trading with a slightly higher bias, led by the South African rand, South
Korean won, and the Mexican peso. Gold has steadied too after approaching $2000
yesterday, a one-month low. It is hovering around $2010 in Europe.
Chinese and Hong Kong stocks
traded higher, apparently helping to lift South Korea and Taiwan shares, but
most of the other large markets in the region traded heavily. However, Europe's Stoxx 600 is
snapping a three-day, 2% drop, but is hardly more than steadying so far today. US
index futures are also slightly firmer, seemingly without much conviction. Benchmark
10-year yields are mostly 1-3 bp lower in Europe and the 10-year US Treasury
yield is off a couple basis points to around 4.08%. February WTI is recovering
from the push to $70.50 yesterday and is trading above $73 today. Iran's
proxies are keeping tensions high in the Red Sea, while tensions with Pakistan
have increased.
Asia Pacific
The Australian labor market
is slowing, but the December figures were simply awful. It lost 65.1k jobs last month, defying
expectations for an increase of 15k. Full-time positions plunged by 106.6k, the
most since May 2020 and sufficient to wipe out gains in H2 23 completed. The
unemployment rate was steady at 3.9% as the participation rate fell to 66.8%
from 67.3%. The market's reaction, however, seems dismissive. The odds of a
rate cut in August fell for the third consecutive session to about 73% from
nearly 90% yesterday. It was fully discounted plus some as of Monday. And the
Australian dollar is snapping a six-day decline. Next week's highlight is the
flash January PMI. The composite spent Q4 23 below the 50 boom/bust level.
Japan confirmed that
industrial output fell by 0.9% in November, leaving it down 1.4% year-over-year.
Ironically, in November
2022, it has also fallen by 1.4% year-over-year. The Japanese economy continues
to struggle, despite a negative interest rate target and a currency that is
more than 50% undervalued according to the OECD model of purchasing power
parity. Tomorrow, Japan reports December CPI, but the Tokyo figures released a
couple of weeks ago contained the new information. The headline and core rates
are expected to slip to 2.5% and 2.3% from 2.8% and 2.5%, respectively. The
measure that excludes fresh food and energy has proven stickier. It is seen
easing to 3.7%, a 10-month low, from 3.8%.
The dollar reached JPY148.50
yesterday, its best level since late November, bolstered by rising US rates and
the paring of Fed rate cuts this year. It settled above the Bollinger Band for the second consecutive
session for the first time since last September. The greenback is trading
quietly today inside yesterday's range and is consolidating between JPY147.65
and JPY148.25. Initial support in North America may be around JPY147.50. The
pace of the yen's descent may soon begin to draw official Japanese attention,
but one-month implied volatility is still relatively subdued near 9.4%, which
is a little below the 200-day moving average (~9.5%) and well off the highs
seen last month (~12%). The Australian dollar's sell-off extended to $0.6525
in early North American dealings yesterday. It barely got above $0.6540
afterwards. Like the yen, the Aussie settled outside of its Bollinger Band for
the second consecutive session, which it has not done since September 2022. It
retested the $0.6525 low today and recording new session highs in the European
morning near $0.6570. The $0.6580-$0.6600 area offers nearby resistance. The
greenback's consolidative tone helped steady the Chinese yuan today, where
yesterday's range has largely confined the price action. The PBOC set the
dollar's reference rate at CNY7.1174 (CNY7.1168 yesterday). It has been set
higher every day this week. The average in Bloomberg's survey was CNY7.1961
(CNY7.1953 yesterday).
Europe
The markets paid little mind
to the eurozone's November current account, which at 24.6 bln euros is above
the November 2021 surplus (before Russia invaded Ukraine) and November 2019
(before Covid). Nor did
the November construction figures impress. The 1.0% decline follows a revised
0.6% decline in October (initially -1.0%). Despite ECB President Lagarde's push
against speculation for an early rate cut, the swaps market has about an 80%
chance of a cut in April. Still, this is the least since late November. The
market has about 138 bp of easing this year discounted. That is five cuts fully
priced in and about a 50% chance of a sixth cut.
The UK reported slower wage
growth amid a softening of the labor market on Tuesday, but higher than
expected CPI on Wednesday. The
net effect has been to see the odds of a May cut, which was fully discounted at
the end of last week, pared to about 60%. The swaps market anticipates about
110 bp of rate cuts this year (four fully discounted and about 40% chance of a
fifth quarter-point cut), down from 170 bp at the end of last year.
According to Bloomberg, the
euro slipped 3/100 of a cent below the 200-day moving average to $1.0845 before
recovering back to session highs in late North American dealings. It may be a bullish hammer
candlestick formation. Still, with the US rate adjustment maybe not complete,
the euro may find sellers into the first bounce. The euro poked slightly above
$1.0905 in the Asia Pacific session and looks poised to extend its gains in
North America. but look for the $1.0920 area to cap the upside on this first
bounce. Sterling recovered smartly from the brief shallow penetration
of the lower end of its $1.26-$1.28 trading range. It nearly reached
the range's midpoint and edged slightly above $1.27 today before backing off to
about $1.2675 in Europe. It may extend its gains in North America with initial
resistance likely in the $1.2715-35 area. Recall that end of last week,
sterling was rebuffed from the upper end of the range (~$1.2785-$1.2800).
America
The US economy finished last
year with somewhat more momentum than expected. December retail sales rose by 0.6%, the
most in Q4 23. The measure that feeds into some GDP models, which excludes
autos, gasoline, building materials, and food services, rose by an impressive
0.8%, the most since last July, and well above the 0.2% gain the median
forecast in Bloomberg's survey. Moreover, the November series was revised to
0.5% from 0.4%. To be sure, the US consumer is pulling back but is not going
into hibernation. Retail sales in Q4 23 were the slowest since Q4 22 when they
declined. A back-of-the-envelope calculation suggests December personal
consumption expenditures may have increased around 0.4%. If true, that would be
a 2.8% annualized increase in Q4 23 after a 6.4% pace in Q3. Separately,
December industrial production eked out a 0.1% gain, while economists were
looking for a contraction of that same magnitude. Still, November's gain of
0.2% was revised away. The Atlanta Fed GDP tracker ticked up to 2.4% from 2.2%
a week ago. The initial estimate of Q4 23 GDP is due next week. The odds of a
March cut were shaved to about 55% from a bit more than 80% at the end of last
week and 100% at the end of last year.
After surging 14.8% in
November, housing starts likely weakened in December. The median in Bloomberg's survey calls for
an 8.7% drop. It would be the first decline in four months and would bring the
housing starts back to the average of the Jan-Nov period of 1.41 mln. The lower
mortgage rates may help the existing home sales (December figures due tomorrow)
and help the activity in the housing market more generally. However, the
Philadelphia Fed survey may be the highlight today. The collapse of the Empire
State manufacturing survey earlier this week (-43.7 from -14.5) draw much
attention and would seem to suggest a horrible start of the New Year. However,
we suggest it is exaggerated and will look for support in the Philly Fed survey.
The median forecast in Bloomberg's survey projects an improvement to -6.5 from
-12.8. That would be the best reading in five months.
The greenback closed above
CAD1.35 for the first time since mid-December. It was the fifth consecutive
advance, and with yesterday's gains to around CAD1.3540, it retraced half of
the losses from the year's high set early last November near CAD1.39. The next
retracement (61.8%) is around CAD1.3625. Although the momentum indicators are
getting stretched, the price action itself gives no sign a top. The US dollar
tested support around the 200-day moving average near CAD1.3480 today and it
held. A break of that area or some kind of reversal pattern would be more
suggestive that that top may be in place. That is what the Mexican peso did.
The US dollar initially extended its gains a MXN17.3860, a little through
the 200-day moving average, and then reversed lower. A bearish shooting star
candlestick may have been formed. If that signals the end of the dollar's
surge, it could see a pullback toward MXN17.00. The greenback has slipped back
to MXN7.16 today so far. Initial support may be near MXN17.10.
Reviewed by Marc Chandler
on
January 18, 2024
Rating:
