Overview: The dollar continues to consolidate
broadly after the dramatic price swings at the end of last week. For the most
part, the greenback remains inside yesterday's ranges, which were inside last
Friday's. The G10 currencies are a little heavier today, except the Japanese
yen and Norwegian krone, which are posting small gains. Indeed, the greenback is near session highs against most of the major currencies as we go to print. Emerging market
currencies are more mixed. Central European currencies and the Philippine peso
are modestly lower, while the South African rand and Mexican peso join the Thai
baht and Malaysian ringgit to advance. Gold is recovering from yesterday's
slide to about $2017, the lowest level since December 18. It is approaching
$2040.
European benchmark 10-year bond
yields are jumping 4-6 bp today, while the 10-year Treasury is up almost one
basis point to 4.04%. Asia Pacific equities were mostly higher, including
mainland China. However, Chinese shares that trading in Hong Kong, and the Hang
Seng itself, South Korea, and Taiwanese shares extended their recent declines.
Europe's Stoxx 600 is giving back about a third of yesterday's nearly 0.4%
advance, while US index futures are paring yesterday's gains too. February WTI
was tagged for 4.1% yesterday, its biggest loss since the middle of last
November. It has recouped almost half of the loss today and is back above $72.
Asia Pacific
The continued moderation of
Tokyo's CPI bodes well for the national trend and suggest that the pressure on
the BOJ to jettison the negative overnight interest rate target has
slackened. Tokyo's
CPI peaked at 4.4% in January 2023 and finished the year at 2.4%, the lowest
since mid-22. The core rate, which excludes fresh food, is at 2.1%, after
peaking at 4.3% at the start of last year. The measure that excludes fresh food
and energy slipped to 3.5% from 3.6% in November. It peaked at 4% July and
August. The national figures are due on January 19, but the Tokyo measure is a
good proxy.
The BOJ meeting concludes on
January 23. There
had been a small minority of participants who thought a hike was possible then,
but after the earthquake, many appear to have joined the majority expect a move
in late April. BOJ officials are not convinced yet that demand is strong enough
to sustain the increase in price pressures. Wages have not kept pace with
inflation and household consumption remains weak. Household spending fell 2.9%
year-over-year in November (2.3% expected). In November 2022, they had fallen
by 1.2% year-over-year. Household consumption posted one year-over-year gain
(last February 1.6%) since October 2022. Labor cash earnings rose 1.5%
year-over-year in October and are expected to have remained there in November.
Adjusted for inflation, real cash earnings were 2.3% lower year-over-year in
October and are expected to be 2% lower than last November with tomorrow's
report.
Australia's retail sales
bounced back in November (2.0% vs 1.2% median forecast in Bloomberg's survey)
after slipping by 0.4% (initially -0.2%) in October. It is the strongest increase since 2021
but may not herald a recovery. In the first 11 months of the 2023, Australian
retail sales rose by an average of 0.5%. In the same period in 2022, retail
sales rose by an average of 1%. Retail sales were flattered by rising prices.
The Australian economy grew by almost 1% in H1 23 but slowed to 0.2% in Q3 and
is expected to have matched that in Q4.
The dollar briefly traded
below the pre-weekend low (~JPY143.80) against the Japanese yen in the North
American afternoon, reaching almost JPY143.65. and slipped further in early Asia Pacific turnover,
reaching nearly JPY143.40. It recovered to JPY144.30 before stalling. Support
is seen in the JPY142.10-40 area. The Australian dollar recorded an inside
session yesterday but closed firmly. Still, it was the fourth consecutive
session of lower highs. Yesterday's high was about $0.6735. and that is where
is stalled today. Yesterday's low was slightly below $0.6680 and so far,
today's low is about $0.6695. The consolidative phase continues. The
greenback also recorded an inside day against the Chinese yuan yesterday and
again today. It too is consolidating. The key remains the pre-weekend range
(~CNY7.1390-CNY7.1710). The PBOC set the dollar's reference rate at CNY7.1010
(CNY7.1006 yesterday). The average projection in Bloomberg's survey was for
CNY7.1490 (CNY7.1498 yesterday).
Europe
"Immaculate
deflation" that has become the market's shorthand for talking about the
rise in interest rates and the easing of price pressures without a much impact
on unemployment. However,
this is not another expression of "American exceptionalism."
Eurozone unemployment was 7.5% before Covid struck. It peaked at 8.6% in
August/September 2020. It bounced around 6.5%-6.6% most of 2023. The
unemployment rate has been at 6.5% since last August and recorded a new low of
6.4% in December. Separately, German reported disappointing 0.7% drop in
industrial output in November. The median forecast in Bloomberg's survey was
for a 0.3% increase. Germany's industrial output has not risen since last
April. The aggregate report for the eurozone is due next week (January 15).
Lastly, the France reported a narrower trade deficit in November (~5.9 bln
euros vs 8.5 bln euros in October). However, the takeaway is that the French
trade deficit is narrower in 2023. Through November, the French trade deficit
in 2023 was almost 96 bln euros. The shortfall in 2022 was slightly more than
164 bln euros, which was nearly twice the 2021 deficit. France's trade deficit
in 2019, before the pandemic was almost 58 bln euros.
The euro traded in about a
quarter-cent range around $1.0950. The market lacks near-term conviction, and the consolidative phase
is continuing. A move above $1.10, last Friday's high, could be seen as a
breakout and spur a quick move higher. On the downside, last Friday's low was
slightly below $1.0880, and yesterday's low was near $1.0925. Sterling
was confined to the upper end of last Friday's range but settled at its highest
level (~$1.2255) since December 27. More formidable resistance is seen
around $1.28, which sterling has not closed above since the end of last July. It
looks to have found support in the European morning near $1.2720 and looks set
to push higher and retest the upper end of its recent range in North America
today.
America
The foreign exchange market
used to be sensitive to the monthly US trade figures. But this is not the case anymore. With the
advanced goods report, the trade balance has been easier to forecast. Perhaps,
in the larger picture, the many participants recognize that importance of
capital flows in determining exchange rates. Though there are different ways to
measure capital flows, they are much larger than trade flows. The US reports
the November trade balance today. The goods balance deteriorated in each of the
three months through November, but despite the over-valued dollar and the
growth differentials, the nominal goods balance was little changed in the first
11 months of 2023 (~985 bln) from the same period in 2022 (~$971 bln). The US
runs a goods deficit but a persistent service surplus. As a consequence, the
overall trade deficit is smaller than the goods shortfall. In
the first 10 months of 2023, the overall nominal trade deficit was about $655
bln, down from around $816 bln in the Jan-Oct 2022 period.
Canada reports its November
merchandise trade balance. It
has experienced a sharp deterioration of its trade goods balance this year and
it seems reflect both lower prices and weaker foreign demand. In the first ten
months of 2022, Canada recorded a goods trade surplus of about C$19.4 bln. In
the Jan-Oct 2023 period the surplus disappeared and a small deficit of around
C$1.5 bln has been recorded. Canada's exports contracted by 5.1% at an
annualized pace in Q3, which saw the Canadian economy contract by a little more
than 1% (annualized) the quarter. Canada reports a monthly GDP figure and that
last time it increased was in May. The November GDP is due on January 31.
Mexico will report its
December CPI today. Like
the US report due Thursday, headline CPI may firm slightly, while the core rate
continues to ease. The year-over-year headline rate is seen rising to almost
4.6% from slightly above 4.3%. The core rate may slip toward 5.15% from 5.3%,
which would be the slowest pace since September 2021. An increase in the
headline rate would be the second consecutive gain. Banxico meets next on Feb
8. It will have the January CPI report in hand when it meets. The swaps market
has about an 80% chance of a cut discounted over the next three months.
The US dollar was turned
back after poking briefly above CAD1.3400 yesterday, its highest level since
December 18. The
greenback reversed low and fell to about CAD1.3345, creating a potential
shooting star candlestick. Follow-through selling today has been marginal at
best (not even $1.3340). A break below CAD1.3300 is needed to boost confidence
a high is in place. The risk is for a re-challenge of CAD1.3400. Follow-through
buying of the Mexican peso lifted it to level not seen since last August. The
dollar fell to almost MXN16.7850. Before the weekend, it traded above MXN17.07.
The greenback's low last year was recorded in late July near MXN17.62. A narrow
range has dominated so far today (~MXN16.8165-MXN16.8520).
Reviewed by Marc Chandler
on
January 09, 2024
Rating:
