Overview: The dollar is firm. Rates are mostly
higher and equities lower. The moves scored in the holiday-thin markets are at
end of last year are being unwound. This does not appear complete yet. Geopolitical tensions remain high but do
not seem to be having a direct market influence as both gold and oil are
trading lower. Among the G10 currencies, sterling has been the most resilient
today but nearly flat. Within the emerging market complex, the Hungarian forint
and Philippine peso are bucking the trend that has seen most of the emerging
market currencies ease. Gold is down for the fourth consecutive session, which
if sustained, would be the longest losing streak in more than two months. February
WTI's dramatic downside reversal yesterday (from nearly $73.65 to $70.05) saw
follow-through selling today that pushed it to almost $69.25, its lowest level
since the December 13 low (~$68).
Asia Pacific equity markets
extended Tuesday's decline, though the Shanghai Composite eked out a small gain.
China's CSI 300 finished nearly 0.25% lower. Europe's Stoxx 600 is off about
0.50% near midday and US index futures are pointing to modest losses. The
10-year US Treasury yield is up about four basis points to 3.97%. The two-year
yield is up three basis points to 4.35%. European benchmark yields are mostly a
little firmer, but German and French yields are slightly softer. The US sees
the ISM manufacturing survey, JOLTS, and later in the session, the December
FOMC minutes. December auto sales will be reported throughout the day.
Asia Pacific
Japanese markets re-open
tomorrow. The
country is coping with the aftermath of the earthquake and airplane accident.
The final December manufacturing PMI is unlikely to be much different than the
preliminary 47.7 reaching, which matches the low for 2023. China's Caixin
services and composite PMI is also due. After the small upside surprise on the
manufacturing PMI, and if the services PMI ticks up as expected, the composite
may rise for the second consecutive month. Australia's final composite December
PMI's preliminary bounce to 47.4 from 46.2 may be revised lower after the
softer manufacturing PMI.
The BRICS expanded by five
new members this week, Saudi Arabia, UAE, Iran, Egypt, and Ethiopia. Argentina
was to join, as well, but the new government has declined the invitation. It is a club but is it a bloc? What will
they do together? They have launched a bank, but most of the loans are not in
the member currencies. Last year, reports highlighted Russia's reluctance to
accept more Indian rupee for oil. India devised some financial products for
Russian investors, but Moscow preferred other currencies, including the UAE
dirham, which like the Saudi riyal, is pegged to the dollar. Indian oil imports
from Russia last month were the least since the start of 2023. An estimated
five ships with crude cargo had been "parked" off the India and the
payment dispute is thought to have prompted the ships to move away from India.
There is some speculation that they will head toward China, where Beijing has
announced the 2024 oil import quotas that nearly match all last year's
approvals (~3.6 mln barrels a day). Note that China's large state-owned
refiners are not subject to import limits and that additional import
permissions are expected as the year progresses. In 2023, a second batch of
quotas (~55% of the initial quota) was issued in June and a third, albeit
smaller quota (~8.5% of the first quota) was issued in October. Separately,
China reimposed import levies on coal that work against Russia's interest.
Beijing's policy has shifted from avoiding supply disruptions, which resulted
into the removal of the tariffs after Russia's invasion of Ukraine, to
protecting Chinese miners from the glut that results from last year's record
domestic output. Russia is China's second-largest coal supplier after
Indonesia. China imposes no tariffs on coal from Indonesia and Australia, where
there are free-trade agreements in place. The new tariff, which will apply to
Russian coal is 6% for power and 3% for coking coal used to make steel.
The dollar recorded
yesterday's high early in the North American session yesterday near JPY142.20. It consolidated most of the session a
little below JPY142.00. The gains were extended to about JPY142.80 today. There
is a nearby band of resistance that is found between JPY142.85 and JPY143.20.
It may be partly a function of how much US rates back up after falling sharply
into the end of last year. Japanese insurers may be US Treasury sellers as they
may repatriate funds to cover claims from the earthquake and tsunami. The
Australian dollar broke down in the North American session and settled at a
nine-day low near $0.6765. Follow-through selling today has seen the
Aussie fray support near $0.6745. There are options for about A$527 mln at
$0.6720 that expire today, while the next technical target is $0.6700 and then
$0.6665. The news stream is light, and the Aussie's decline looks more like
unwinding the recent gains amid the greater risk-off mood. The
greenback reached CNY7.1535, its highest level since December 13. Recall
that the dollar gapped lower on December 14. The top of the gap is the low from
December 13 (~CNY7.1710). That seems to be the near-term technical target. The
PBOC's set the dollar's reference rate at CNY7.1002, up from CNY7.0770
yesterday. The average projection in Bloomberg's survey was CNY7.1467.
Europe
The eurozone and UK economic
diaries are quiet today but pick up tomorrow with the final December PMI readings. The UK will also report consumer credit
and mortgage lending figures for November tomorrow. The eurozone finishes the
week with the preliminary December CPI, where the base effect points to a
countertrend increase.
Switzerland returned from
its long New Year celebration, and it was greeted with an uptick in the
December manufacturing PMI. It rose to 43.0 from 42.1, a three-month high. It is the fourth
gain in five months, suggesting that the worst may be past but that the growth
impulses remain poor. Recall that last week, amid the elevated tensions in the
Red Sea and Russia's intense attacks on Ukraine, the dollar fell to its lowest
level since 2015 against the Swiss franc (~CHF0.8335). It reached almost
CHF0.8510 yesterday and has edged a little higher today. A move above CHF0.8525
may target the CHF0.8580-CHF0.8635 area.
The euro peaked on December
28 nearly $1.1140, up from about $1.0725 seen with the US November employment
data on December 8. The
pullback extended to almost $1.0940 yesterday, and today has fallen to about $1.0925,
through the 20-day moving average (~$1.0945) and meeting the (50%) retracement of
the rally. The next retracement target (61.8%) is near $1.0885. Last year's low
was set in early October around $1.0450. The $1.0875 area corresponds to a
(38.2%) retracement. Sterling broke down and settled below its 20-day
moving average (~$1.2665) for the first time in three weeks. It could
prove to be resistance now. The session high, so far today, has been just shy
of $1.2655. Sterling reached almost $1.2610 yesterday and this area held today.
The next area of technical support is seen near $1.2575.
America
Yesterday's unexpected
downward revision to the US December manufacturing PMI (47.9 from 48.2
preliminary estimate and 49.4 in November) may warn of downside risks with
today's manufacturing ISM. However, in the 11 months of last year which there is data for,
the two surveys moved in the same direction six times and deviated the other
five. This is to say, that knowing the manufacturing PMI may not help one
anticipate the direction of the manufacturing ISM. Still, they both point to a
weak manufacturing sector. Except for April 2023, the PMI has been below the 50
boom/bust level since November 2022. The same is true for the ISM but it did
not share that April exception. The median forecast in Bloomberg's survey has
the manufacturing ISM edging up to 47.2 form 46.7. It true, would be the
highest reading since last February. The US also sees the November JOLTS report
and economists look for the first gain since August. The number of job openings
fell to 8.73 mln in October from nearly 9.5 mln in August. December auto sales
will be drip-fed to the markets throughout the day. Aggregate, seasonally
adjusted annualized sales are expected to have bounced back after two months of
declines. US auto sales through November are up nearly 12% from the year ago
period. November sales were about 8.5% above November 2022 sales. December 2022
vehicle sales were particularly poor at 14.14 mln (SAAR) and the Bloomberg
median estimate of 15.5 mln would represent an almost 16.5% increase.
The FOMC minutes from last
month's meeting may draw closer scrutiny that usual. On the eve before the meeting's
conclusion, the Fed funds futures discounting about a 42% chance of cut at the
March 2024 meeting. Shortly before Christmas, the futures had a quarter point
fully discounted plus a little more. A March cut after delivering the last hike
in July is within the normal range but given the questions about its
anti-inflation credentials after a slow end to the QE and start of the
tightening cycle, coupled with something near trend growth in Q4 23, the market
seems overconfident. At its peak, the market had about 160 bp of rate cuts
discounted for this year. It is now 150 bp. Before the Fed met last month, the
market was already discounting slightly more than 100 bp of cuts this year. The
median projection by the Fed officials was for three cuts. A common narrative
is that the Fed will cut the Fed funds rate but frame it so that it is not
easing policy as much as maintaining the current level of restriction in the
face of falling inflation, the real rate. However, the real rate is elusive and
cannot be measured directly. Reasonable people may differ in assessing the real
rate. One simple way that seems to be what many are doing is subtracting
inflation from the nominal rate, though nominal rates should be adjusted for
inflation expectations rather than current inflation measures. Still, in July
2023, before the Fed's last rate hike, the average effective Fed funds rate was
5.08%. The CPI stood at 3.2%. The average effective Fed funds is now steady at
5.33% and the CPI was at 3.1% in November and may have risen back to 3.2% in
December.
The US dollar rose by about
0.65% against the Canadian dollar yesterday, its biggest single-day advance
since mid-October. The
greenback approached CAD1.3335, and the (38.2%) retracement of the decline from
the December 12 high (~CAD1.3620) is near CAD1.3345. The US dollar is in a
narrow range today near yesterday's highs and there are options for a little
more than $1 bln that expire today at CAD1.3340. The (50%) retracement is
closer to CAD1.3400. The 20-day moving average is a little lower near
CAD1.3380, which the US dollar has not closed above since mid-November. The
greenback pushed higher against the Mexican peso and poked above MXN17.07, its
highest level since December 21. It is holding slightly below there in
quiet dealings today. Disappointing economic data did not help the peso in the
face of a broadly stronger US dollar. The manufacturing PMI slipped (52.0 vs.
52.5) and the IMEF surveys were softer (with the manufacturing survey falling
below 50 for the first time since May) and a sharp drop in November worker
remittances (which are often seasonally weak). The dollar may have near-term
potential toward MXN17.13-15.
Reviewed by Marc Chandler
on
January 03, 2024
Rating:
