Overview: The sharp dollar advance is stabilizing after
follow-through gains earlier today. A larger than expected rise in the UK's
December CPI helped sterling recover from the push below $1.26, the lower end
of a one-month trading range. It is the only G10 currency that is firmer
against the dollar ahead of the North American session. ECB's Lagarde pushed
back against the early rate cut speculation and this may have stemmed the
euro's losses. The greenback approached JPY148 and remains near there now. Taiwan,
South Korea, and Mexico lead emerging market currencies lower.
Equity market losses are accelerating. In the sea of
red in the Asia Pacific region, HK stood out was a 3.7% drop and the CSI 300
was off 2.2%. Europe's Stoxx 600 is lower for the third consecutive session,
and its 1.2% loss is more than the previous two sessions combined. US index
futures point to continued pressure on US equities today. European benchmark
10-year rates are mostly 1-4 bp higher, thought the Gilt yield has jumped nine
basis points. The 10-year US Treasury yield is hovering 4.05%, little changed
on the day. Gold is near $2033, the middle of today's range. February WTI,
which peaked on Monday near $75 fell to almost $70.60 today, a five-day low.
Asia Pacific
Many observers and much of the financial press
emphasizes China's economic weakness. For
more than two decades, long before the property bubble was pricked, American
and British economists have warned that the Chinese system is collapsing. Far
from contracting, the Chinese economy grew by 1.0% quarter-over-quarter in Q4
for a 5.2% year-over-year pace. Growth in Q3 was revised to 1.5%
quarter-over-quarter from 1.3%. Many G10 countries will not grow in a year what
China did in Q4. The details of China's growth in December also seem to defy
the conventional narrative. For example, western economists and the
multilateral lenders claim China over invests and under consumes. Yet, China's
data today showed non-rural fixed asset investment rose by 3% last year, while
retail sales grew at more than twice the pace (7.2%). Consumption per capita
has more than doubled in the past decade.
The auto sector has received much attention as China
becomes the world's largest exporter. Almost 22 mln autos were sold in China
last year and a little over 4 mln were exported. Yet, China is being used as an export platform
and many of the auto exports are not Chinese brands. In addition, China's
vehicle exports last year surged to Russia as European and Japanese brands
pulled back. The steady drum of criticism of China distracts from the truly
disruptive action, such as the land grab in Nepal and Bhutan, and the audacious
efforts of intimidating the Philippines, with whom the US has a defense treaty.
Much of the trade arguments and US tactics, including export controls on
high-tech, were used against Japan (and Europe previously). However, companies
from those areas were encouraged to substitute exports to the US for direct
investment in the US while Chinese companies are being deterred.
The dollar surged by slightly more than 1% against the
Japanese yen yesterday, the biggest single-day advance since the end of last
October. It reached nearly
JPY147.30 yesterday and almost JPY148 today. It finished last year slightly
above JPY141. The next technical area is closer to JPY148.50. Still, the move
has been rapid. The greenback closed above its upper Bollinger Band yesterday,
though is coming back within it (~JPY147.65) in the European morning. Initial
support is now seen around JPY147.25. The Australian dollar was tumbled
about 1.2% yesterday, its largest fall since the middle of last October. Follow-through
selling today has extended the Aussie's decline for the fifth consecutive
session to test the $0.6530 area. It fell yesterday below the 200-day moving
average (~$0.6585) for the first time since mid-December. Support is seen near
$0.6500. A break of it targets the $0.6500 area. The Australian dollar is below
the lower Bollinger Band (~$0.6580) and that area may offer intraday resistance.
The dollar edged up to almost CNY7.20 today, its highest level since late
November. The PBOC set the dollar's reference rate at CNY7.1168,
slightly higher than yesterday. The reference rate was CNY7.1050 at the end of
last week. The market anticipated a faster pace of yuan depreciation. Today's
average in Bloomberg's survey was CNY7.1953. It was at CNY7.1696 at the end of
last week. Chinese officials are moderating the pace of the yuan's decline, not
fully resisting it.
Europe
The UK reported stronger than expected December CPI
edged. The 0.4% increase was twice
what was expected, and the year-over-year rate is 4.0%, up from 3.9% in
November. The monthly gain follows a 0.2% decline in November and a flat
October reading. That means that at an annualized rate, UK CPI was 0.8% in Q4
after a 1.6% annualized pace in Q3. The year-over-year pace may tick up in
January when January 2023's 0.4% decline drops out of the 12-month measure, but
the underlying signal is for UK inflation to fall sharply in H1 24. In the
February-May 2023 period, UK CPI rose at an annualized rate of a stunning
11.4%.
Making some conservative assumptions, UK headline CPI
could fall toward 2% by mid-year. The
UK's core CPI peaked last May at 7.1% and has steadily fallen, reaching 5.1% in
November and was unchanged last month. Producer price pressures are subdued.
Input prices have been falling year-over-year since last June and output prices
had fallen year-over-year in four of the five months through November. In
December, input prices were off 2.8% year-over-year and output prices were up
0.1% year-over-year. The market's confidence of the first BOE rate cut in May
softened today to about 67% from 88% yesterday and 100% at the end of last
week.
After moving sideways inside the range set on January
5 (US jobs day), the euro broke down yesterday to approached $1.0860. Follow-through selling today has been limited to
almost $1.0855, perhaps helped by comments by ECB President Lagarde pushing
back against speculation of a rate cut before the summer. The euro frayed
the lower Bollinger Band (~$1.0870) but did not settle below it. The lower
Bollinger Band is a little above the 200-day moving average today (~$1.0850).
The euro may have carved a potential head and shoulders topping pattern. The
neckline is a little below $1.0870, which was nicked on an intraday basis. The
measuring objective is near $1.06. Given the momentum indicators, this seems
somewhat deeper than we anticipate. Instead, on a convincing break of the
$1.0850 area, we envision a move toward $1.0765 and possibly $1.0725. Sterling
came off yesterday but held above the lower end of its one-month range at
$1.26, which it nicked today before recovering after the CPI. It
rebounded smartly but stalled in front of $1.27. We suspect it will come
back off in the North American session. The euro has broken down against
sterling to a new low for the year (~GBP0.8570). The four-month low set in
December was near GBP0.8550.
America
Today's US economic data, retail sales and industrial
production, and tomorrow's housing starts, are the last important inputs ahead
of the January 25 initial estimate of Q4 GDP. After today's reports, the Atlanta Fed's GDP tracker
will be updated from 2.2% on January 10. The median forecast in Bloomberg's
survey calls for 0.4% increase December retail sales (0.3% in November). The
headline was likely boosted by auto sales. Core retail sales, excluding autos,
gasoline, food services, and build material, rose by an average of 0.5% a month
in Q2 23 and Q3 23. The median forecast in Bloomberg's survey is for a 0.2%
increase in December, which would put the average at 0.2%, confirming the
slowdown in consumption. The GDP measure on consumption rose by 3.1% at an
annualized rate in Q3 and is seen slowing to about 2.0% in Q4. The pace is
expected to be halved here in Q1 24. Turning to industrial production, output
is expected to have slipped by 0.1% in December (+0.2% in November). It would
be the second decline in Q4 23. Manufacturing output itself may be flat after
rising by 0.3% in November. Late in the session, the Fed's Beige Book for the
January 30-31 FOMC meeting will be released. We look for it to be consistent
with a further moderation of economic activity and some easing of labor market
conditions.
Canada's December CPI reported yesterday saw a 0.3%
decline on the month. But owing
to the base effect, the year-over-year rate ticked up to 3.4% from 3.1% in
November. The underlying core rates firmed slightly. However, the underlying
signal is that price pressures are easing and will likely fall sharply in the
first part of this year. Canada's headline CPI rose by an average of 0.4% a
month in H1 23. In H2 23, it rose by an average of 0.1%. If Canada CPI averages
a 0.2% gain a month in H1 24, the year-over-year rate will be near 2% by
mid-year. Today, Canada reports its November portfolio flows. Through October,
the foreign appetite for Canada's paper assets was halved from a year ago.
Specifically, in the first ten months of this 2023, foreigners bought a net
C$5.2 bln of Canada's bonds and stocks compared with C$10.4 bln in the same
period in 2022. Moreover, foreign investors were net sellers of near C$31 bln
in September and October combined. This appears to be the largest two-month
divestment on record.
Although the market lowered the chances marginally of
a Bank of Canada rate cut in April, it still is the odds-on favorite timing. The implied odds of about 75% is the lowest since last
November. Still, the Canadian dollar drew little comfort, and the greenback
spent the North American afternoon in a narrow range near CAD1.3500. The US
dollar closed above its upper Bollinger Band (~CAD1.3490) for the first time in
three months. Follow-through buying today lifted the greenback to about
CAD1.3530, just ahead of the next technical target may (CAD1.3540). A US dollar
top may still not be in place. The Mexican peso was tagged for nearly
2% yesterday, the most among emerging market currencies. The dollar is
up by slightly more than 0.50% in the European morning. It reached around
MXN17.37. The 200-day moving average is near MXN17.38. The lurch lower by the
peso seemed to reflect a combination of market positioning and the greenback's
broad rally. The dollar settled above its upper Bollinger Band (~MXN17.1620).
There seem to be little standing in the way of a test on last month's highs in
the MXN17.56 area. The Brazilian real lost about 1.3% yesterday. The dollar
closed above its 200-day moving average (~BRL4.93) for the first time in a
month. Last month's high was near BRL4.98 and that would be the next target,
though the BRL5.00 may be more important.
Reviewed by Marc Chandler
on
January 17, 2024
Rating:
