Overview: The broad consolidation in the dollar after the
gyrations at the end of last week continues, and within it the greenback is a
bit softer today. Among the G10 currencies, only the yen is failing to post
gains. Most emerging market currencies, led by central Europe, are also firmer
today. A notable exception is a handful of Asian currencies, include the South
Korean won, Taiwanese dollar, and the Philippine peso. The market's focus is on
tomorrow's US CPI. Meanwhile, the US 10-year yield is lower for the third
consecutive session and is below the 4% threshold ahead of today's Treasury
auction. European benchmark 10-year yields are also 2-4 bp lower. Despite a
weak reception to its 10-year bond sales, the disappointing wage growth in
Japan helped restrain yields and the 10-year JGB yield slipped slightly to
almost 0.57%.
Japanese stocks, on the other hand, extended their
rally. The 2% advance lifted the Nikkei to new highs since the early 1990s.
Most of the other large bourses in the region fell. Europe's Stoxx 600 is
steady after slipping by 0.2% yesterday. US index futures are trading with a
slightly firmer bias. Several large banks kick off the earnings season at the
end of the week. Gold is trading quietly mostly between $2025 and $2040 today,
well within the recent range. February WTI is in a narrow range of a little
more than a dollar below $72.75. API estimated that private crude inventories
fell by about 5.2 mln barrels, which is a much larger drop that expected from
the government's calculation due later today.
Asia Pacific
Japan reported a smaller-than-expected rise in Tokyo's
December CPI (2.4%) and weaker-than-expected household spending (-2.9%) in
November yesterday. Today, it is
has followed up with a miserly 0.2% year-over-year increase in labor's cash
earnings, down from 1.5% in October, which had been flattered by bonus payouts.
The median forecast in Bloomberg's survey for steady report. In the year
through November 2022 earnings rose 1.9%. Wages have lagged inflation. Real
cash earnings have fallen on a year-over-year basis without exception since
April 2022. This is not a post-Covid developments. Real cash earnings were
negative in 2019 (except in September) and in six months in 2018.
Australia's monthly CPI report showed CPI falling to
4.3% year-over-year in November from 4.9% in October, a slightly
larger-than-expected decline. Traditionally,
Australia reports inflation quarterly but introduced a monthly measure in
October 2022. It peaked at 8.4% in December 2022. The November 2023 print was
the lowest since January 2022. The Reserve Bank of Australia forecasts CPI to
fall to 3.3% this year. The IMF is less sanguine and forecasts a 4% increase.
Australia's overnight target rate is 4.35%. Three G10 countries are
lower: Sweden (4.0%), Denmark (3.6%), and Japan (-0.1%). The futures
market is discounting about an 60% chance of a cut near the end of H1 24. A cut
had been fully discounted in the second half of December. Two cuts this year
are almost completely discounted. Before the central bank meets on February 6,
it will have the quarterly CPI in hand and another jobs report.
The dollar tested the 200-day moving average against
the Japanese yen yesterday near JPY143.40, a three-day low. It recovered to new session highs to slightly above
JPY144.60. The gains were extended to JPY145.15 in the Asia Pacific session
today before retreating to around JPY144.80 in the European morning. There are
some chunky options struck at JPY145: $1.9 bln in options expiring there today
and another batch for $1.6 bln expiring on Friday. The dollar's recovery
materialized without much help from US rates, which were practically unchanged
yesterday and the $52 bln sale of three-year notes was well received. Despite a
sharply low yield (4.10% vs. 4.49% at the last auction), the bid-cover rose to
2.67 (from 2.42). Today's 10-year and tomorrow's 30-year sale (another $58 bln
combined) may be more challenging. The Australian dollar was turned
from $0.6735 on Monday and again yesterday. Still, it is finding
support in the $0.6675-80 area. The next immediate target is the low from
last Friday near $0.6640. The daily momentum indicators are trending lower and
are not yet stretched. Against the Chinese yuan, the dollar settled at
its best level since December 13 around CNY7.1685. It reached slightly
above CNY7.1765 today before steadying. There is much speculation in the
market about a cut in in the benchmark one-year Medium Term Lending Facility
(now 2.50%) at the start of next week. There is also speculation that a required
reserves can be reduced again shortly. Last month's high was near CNY7.1785.
The dollar peaked against the offshore yuan in December near CNH7.20 but
stalled yesterday and today near CNH7.1880. The PBOC set the dollar's reference
rate at CNY7.1055 compared with the average in Bloomberg's survey of CNY7.1625.
Europe
Germany reported a dismal 0.7% drop in November
industrial output yesterday. Today,
France reported that the three-month drop in industrial production (-4% at an
annualized rate) ended in November with a 0.5% gain, well above the flat report
expected. While industrial output may be stabilizing, goods consumption is more
precarious. The November figures are due tomorrow and household consumption is
expected to have fallen by 0.2%, after a 0.9% fall in October. Through October,
monthly consumption was unchanged on average, and this is after adjustment for
inflation. However, in the three months through October, an average of a 0.5%
decline was recorded. In GDP terms, French consumption rose by 0.2% in Q2 23
and 0.3% in Q3 23. The French economy contracted by 0.1% in Q3 23 and may have
expanded by 0.1% in Q4. The central bank forecast 0.9% growth this year. The EC
is more optimistic and forecasts 1.2% expansion this year and the IMF is at
1.3%.
French President Macron has begun the new year with a
government shakeup that has seen Prime Minister sacked (technically she
resigned apparently at his request). She shepherded Macron's controversial legislation (retirement reform in
2022 and last month, a contentious immigration bill. Borne has led a minority
government since 2022 and relied on conservative votes to pass the immigration
legislation. Attal, the education minister, replaces Borne. Macron, who cannot
run again when his second term ends in 2027, has seen his approval rating fall
to around 27%, according to the latest Elabe survey (Borne's at 23%, trailed
Macron). Attlal is the second-most French politician now with 39% support.
Former PM Philippe is slightly ahead. Macron's new government appears aimed at
positioning ahead of the June EU Parliament elections and trying to influence
the competition for his successor. The market (bonds and equities) seemed to
barely react to France's political developments.
The euro continues to chop inside the range set after
the US employment data at the end of last week: ~$1.0875-$1.10. On Monday and Tuesday, the day's range was limited to
about a half-of-a-cent. It is in slightly more than a quarter-cent range above
$1.0920 today. It has held below $1.0985, where options for 2.2 bln euros
expire today. Although the euro reached approached the initial retracement
target ($1.0875-85), the price action does not suggest a low is in place and
the momentum indicators are still falling. We can envision another leg lower
toward $1.08 or so. It is difficult to get excited about sterling,
which continues to be mired in a two-cent range (~$1.26-$1.28). It is
straddling the middle of the range (~$1.2685-$1.2735) There are options
expiring at both ends of the range on Thursday (GBP400 mln at $1.2790) and
Friday (GBP655 mln at $1.2600). We are more inclined to see a downside break
and the first test may be on the $1.2500-40 area, which houses the 200-day
moving average and last month's lows.
America
The focus is really on tomorrow's US December CPI
report. Today's final November
wholesale inventory report is more for economists than market participants. The
supply chain disruptions led to an accumulation of inventories (2021 and into
2022) and spent most of 2023 in a liquidation phase. Through November, wholesale
inventories fell by an average of 0.3% a month in 2023, after growing by an
average of 1.5% a month in the Jan-Nov 2022 period. Following the inventory
report, the Atlanta Fed will update is GDP tracker. After the recent batch of
data, including the PMI, ISM, and trade reports, the tracker slipped to 2.2%
from 2.5% on January 3. Late in the session, NY Fed President Williams gives a
speech on the 2024 economic outlook. As the vice-chair of the FOMC, the NY Fed
is the only Fed president that has a permanent vote. He is part of the central
bank's leadership and is typically on message.
Canada reported a smaller-than-expected goods surplus
for November, but the October surplus was revised slightly higher. However, the figures were sufficient to turn what had
been a trade deficit though October into a small surplus in the first 11 months
of 2023. However, neither that nor the 2.4% jump in WTI were about to offset
the risk-off mood on the Canadian dollar. The greenback posted a higher high
for the third consecutive session, rising to CAD1.3415, which it had not seen
since December 15. It has come back softer today. We suspect the CAD1.3350-60
area will hold. The Mexican peso's four-day rally was snapped yesterday
after the December CPI figures. The roughly 0.85% pullback in the peso
was the largest decline in about a month. Headline inflation at 4.66% was a
little firmer than expected while the core rate at 5.09% was slightly softer
than expected. The bi-weekly reading saw the core rate fall below 5% for the
first time since second half of September 2021. The swaps market has the first
cut discounted for later this quarter. The dollar recorded a four-month low on
Monday near MXN16.7850 and reached almost MXN16.99 yesterday. It poked briefly
above MXN17.0 today. All the Latam currencies fell yesterday, and the Chilean
and Colombian pesos fell more than the Mexican peso. Nearby resistance is seen
in the MXN17.05-MXN17.10 area.
Reviewed by Marc Chandler
on
January 10, 2024
Rating:
