Overview: The dollar's surge in the first part of
the week has given way to consolidation. The US dollar is sporting a softer
profile against most of the G10 currencies. The Dollar Index is threatening to
snap a three advance. Sterling is a notable exception following the weakest
retail sales report since 2021. Most emerging market currencies, including
China, Taiwan, and Mexico are slightly firmer. US President Biden is expected
to sign a bill today that avoids a partial government shutdown but only
extended the spending authorization until March 1 and March 8.
The equity rally in North
America yesterday, which saw the NASDAQ 100 set a new record-high seemed to
help bourses in Asia Pacific today, led by a 2.6% jump in Taiwan. China's
stocks were the main exception and reports suggest one of the largest brokers
curbed short sales by some investors. Europe's Stoxx 600 is posting a small
increase after rising by almost 0.6% yesterday. US index futures point to a
firm open. The 10-year US Treasury is flat near 4.14%, a 20 bp increase this
week. European bond yields are 2-5 bp lower, with the periphery outperforming
the core. The US two-year yield is also flattish today and up about 20 bp this
week. Gold tested support at $2000 in the middle of the week and is now near
$2030. Resistance is seen near the midweek hike around $2035. March WTI has
been pushed above $74 to trade at its best level since Monday when it
approached the 200-day moving average slightly above $75. Note that the despite
the cold spell in much of the US, March natgas has fallen nearly 9.5% Europe's
benchmark is off nearly 8.8% this week.
Asia Pacific
Japan's reported its
national CPI for December earlier today. The information that it contained was largely anticipated
in the Tokyo report out earlier this month. The national year-over-year
headline and underlying rates fell about as much as Tokyo signaled. It puts the
headline rate at 2.6% (from 2.8%) at the end of last year. The core rate, which
the BOJ targets eased to 2.3% (from 2.5%) and the measure that excludes fresh
food and energy slipped to 3.7% (from 3.8%). The headline rate peaked at 4.3%
last January. The BOJ has maintained negative rates and yield-curve control in
the face of what it argued was cost-driven inflation. Last October, the BOJ
forecast core CPI to be at 2.8% at the end of the current fiscal year (March
31) and the next fiscal year (March 31, 2025). At next week's meeting, it is
likely to reduce these forecasts. Separately, the tertiary industry activity index
fell for the third consecutive month, defying expectations for a small
increase. It fell by 0.7% last November, after falling a revised 0.2% in
October (initially -0.85) and dropping 1.2% in September. The world's
third-largest economy contracted by 2.9% at an annualized pace in Q3 but is
seen returning to growth in Q4 23, with an expansion of slightly less than 1%
as consumer spending and business investment expand for the first time in three
quarters.
The yen was sold to a new
low following the disappointing tertiary report. The dollar reached JPY148.80, its best
level since late November, but has reversed lower and looks poised to test
yesterday's low(~JPY147.65). A close below there would weaken the near-term
technical outlook, suggesting the consolidative tone remains intact. While
South Korean and Taiwanese officials have expressed concern for the speed that
their currencies have declined recently, Japanese officials have been
noticeably quiet. The BOJ meets next week and expectations for action have been
scaled back. However, because the US interest rate adjustment does not appear
over, we suspect this is still dollar-bullish consolidation. Despite the
poor employment data, the Australian dollar was the best performing G10
currency yesterday, gaining about 0.35% against the US dollar. Follow-through
buying today has seen the Aussie approach Wednesday's high near $0.6595. It
poked above $0.6600 in the European morning, but the intraday momentum readings
are stretched and there are options for about $775 mln in options struck at
$0.6600 that expire today. Still, a weekly close above the $0.6610 area could
help stabilize the technical tone. Knowing that the yen traded with a
slightly firmer bias would suggest the Chinese yuan would likely steady today
and that is what has happened. It has largely traded within yesterday's
range. The PBOC set the dollar's reference rate at CNY7.1167 (down from
CNY7.1174 on Thursday). The average projection in Bloomberg's survey was
CNY7.1913 (vs. CNY7.1961). The dollar has been capped this week ahead of
CNY7.20.
Europe
The UK consumer went into
hibernation at the end of last year. December retail sales plunged by 3.2% in December. The median
forecast in Bloomberg's survey anticipated a 0.5% decline. That means that
retail sales fell 2.4% on a year-over-year basis. Unlike many other countries,
the UK reports retail sales in volume terms not price. Earlier this week, we
learned that the labor market is slowing, and price pressures are easing. Talk
of recession is picking up, but the swaps market sees less of a chance of a May
rate cut. At the end of last week, a cut was fully discounted. Now, there is a
little less than a 70% chanced priced. A week ago, the 130 bp of cuts this year
was seen and now about 118 bp.
The euro is less than a
quarter-cent range below $1.0890 so far today. For the past two sessions, the euro has
found support near the 200-day moving average, slightly below $1.0850. The euro
peaked yesterday in Asia near $1.0910 and European and North American
participants sold into the upticks. Still, Wednesday's low held, and the
consolidation phase is continuing. We are inclined to see a downside break, but
a close above the downtrend line coming around $1.0925 today and slightly above
$1.0910 on Monday would but the near-term bearish outlook at risk. The ECB
meets next week, and its position seems clear. A rate cut in Q1 is too soon,
and this is likely the message that ECB President Lagarde reiterates. Sterling
is uninspiring. It is around the middle of a two-cent range:
$1.26-$1.28. Neither bull nor bear can be satisfied. It reached $1.2715
earlier today, a three-day high, before the dismal retail sales report. However,
it is holding above yesterday's low near $1.2650. Last Friday, sterling
approached the upper end of the range, and in the middle of this week, it
frayed the lower end briefly.
America
US existing home sales are
not what typically move the capital markets. The decline in mortgage rates may helping stabilize
existing home sales. They fell uninterrupted in the five months through last
October. Existing home sales edged up by almost 0.8% in November and are
expected to have firmed by 0.3% in December according to the median forecast in
Bloomberg's survey. The November TIC report on portfolio investment will be
reported late in the day. The US experienced a net outflow of portfolio capital
in September and October 2023. Through October, foreign investors bought a net
of around $490 bln of US paper assets. This is down from $1.36 trillion in the
first 10 months of 2022.
Canada and Mexico report
November retail sales today. After a 0.7% increase in October, Canadian retail sales are
expected to have stagnated in November. Through October, Canada's retail sales
have risen by an average of 0.2% a month in 2023 after an average increase of
0.6% a month in the Jan-Oct period in 2022. Mexican retail sales have performed
similarly. This year's average gain through October was 0.2% compared with an
average of 0.7% in the same period in 2022. Mexico's retail sales fell each
month in Q3 nearly recouped it all with a 0.8% gain in October. The median
forecast in Bloomberg's survey is for a 0.6% increase in November.
Since the start of the year
through the middle of this week, the US dollar rose by about 2.25% against the
Canadian dollar to CAD1.3540. This overshot the (38.2%) retracement of the decline from last
November's high, but the greenback has not closed above it (~CAD1.3510). The
greenback is trading below the shelf near CAD1.3480 had been formed in recent
days and traded to a three-day low slightly below $1.3465. Nearby support is
seen around CAD1.3420-40. and a close below it, would likely coincide with a
risk-on (higher stocks) could suggest a larger US dollar pullback ahead of the
Bank of Canada meeting in the middle of next week. The Canadian dollar's
roughly 0.5% loss this week puts makes it the best G10 performer this week. We
note that the Canadian dollar often outperforms on the crosses in a firm USD
environment. The greenback peaked near MXN17.3860 on Wednesday before
reversing lower. Follow-through selling yesterday took it to nearly
MXN17.1530 and to about MXN17.1360 today. The price action reflects robust peso
demand into pullbacks, and the carry may offer a place for momentum traders to
sit out a consolidative phase. Still, the peso's is off 1.6% this week, making
it the weakest in the region. Note that the best Latam currency this week
coming into today was the Colombian peso (~-0.15%) but may be vulnerable
following the cut in the outlook to negative by S&P, citing poor growth
prospects. S&P maintained Colombia's BB+, one step below investment
grade.
Reviewed by Marc Chandler
on
January 19, 2024
Rating:
