Overview: US markets are closed for President's Day,
while China's markets re-opened from the long Lunar New Year holiday. Mainland
stocks advanced, while the yuan slipped slightly. The US dollar is mostly
softer but in narrow ranges. The Antipodeans and yen lead, while the Swiss
franc the only G10 currency that is slightly softer. Most emerging market
currencies are lower, led by about a 0.5% loss of the South African rand. The
Mexican peso's and South Korean won's small gains are the exceptions.
Stocks in the Asia Pacific
region were generally higher, led by China, but foreign inflows lifted South
Korea's Kospi by 1.2%. Japan's markets were mixed. Europe's Stoxx 600 is
treading water. It advanced 1.4% last week, its fourth consecutive weekly gain.
US index futures are slightly firmer with no cash market today. There is much
anticipation of Nvidia's earnings in the middle of the week. European 10-year
yields are mostly 1-2 bp lower today. Gold set recorded the low for the year
last Wednesday near $1984 and is rising for its third consecutive session today.
It traded to $2023, just ahead of resistance in the $2024-$2025 area. April WTI
settled before the weekend near $78.45, its highest close since early last
November. It is consolidating today in a roughly $77.65-$78.35 range.
Asia Pacific
China returned from the
Lunar New Year holiday. Optimism
of a recovery in consumption helped mainland stocks trade higher. Mainland
shares that trade in Hong Kong rallied 4.75% last week. It was the first
back-to-back gain since last November. However, today the CSI 300 rose almost
1.2%, while the Chinese shares that trade in HK fell by 1.3%. The PBOC kept the
one-year Medium-Term Lending rate steady (2.5%), and Chinese banks will likely
do the same with the loan prime rates tomorrow, though there is a small chance
that they pass through more of last August's PBOC rate cut.
The contraction of the
Japanese economy in Q4 23 surprised nearly all economists. Consumption and business investment fell
for the third consecutive quarter. This is the longest streak since Q2 08-Q1
09. Capex fell for four quarters, from Q2 12 through Q1 13. These are the two
sectors that need to be monitored closely to see the economy is contracting for
a third quarter. The preliminary January machine tool orders are worrisome. Domestic
orders collapsed by 20% on the month, and foreign orders were off nearly half
as much.
The dollar approached JPY152
in 2022 and again in 2023. There seems little to prevent another test. Last week, MOF officials issued their
first warning of the year about the exchange rate, but the dollar finished
higher the seventh consecutive week. Although intervention could happen outside
of Japanese hours, there is a bit more a diplomatic hurdle. We suspect while by
various measures the yen is extremely undervalued (OECD's model of purchasing
power parity puts at more than 50% below fair value), material invention would
not receive a sympathetic hearing by the US Treasury. Moreover, a claim of undesirable
volatility also rings hollow. Three-month implied vol fell to 8.7% the end of
last week, a new low since early last December. The greenback is trading
quietly, albeit with a softer bias today. Initial support has been found
slightly below JPY149.90 and additional support is seen in the JPY149.50-60
area. The Australian dollar rose four sessions last week, the most in
three-months, though the magnitude of last week's gain was minor, around 0.10%.
It finished last week on a week firm note, setting a new five-day high
ahead of the weekend. But it settled slightly below the 20-day moving average
(~$0.6540). This area corresponds to the (61.8%) retracement of the Aussie's
sell-off since the US jobs data on February 2. It set a high near $0.6610
before the data, and today, briefly traded above $0.6550, its best level since
then. A close now below $0.6525-30 would be disappointing. Before the
holiday, the US dollar settled at about CNY7.1935. It held above there today
and reached around CNY7.198.5 It has not traded above CNY7.20
in three months. The PBOC set the dollar's reference rate at CNY7.1032
(CNY7.1063 before the holiday). The average forecast in Bloomberg's survey was
CNY7.1946 (CNY7.1919 previously). The dollar slipped against the offshore yuan
for the fourth consecutive session. It has not traded below CNH7.20 since
February 7.
Europe
At the end of last month,
the swaps markets had an ECB cut fully discounted for an April and 160 bp of
cuts all year. Now it has
about a 45% chance of an April cut and almost 107 bp of cut this year. At the
end of January, the swaps market had the first rate BOE rate cut fully priced
in June and almost a 50% chance of a second. Now, the market sees the chance of
a June hike as also an even money proposition. Since the end of last year, the
extent of BOE rate cuts this year has reduced to 68 bp from 113 bp at the end
of January. Despite these developments, the euro is off about 0.4% this month
and sterling has lost around 0.6%.
Last week, the EC lowered
its forecast for eurozone growth this year to 0.8% from 1.2% previously. It also shaved 2025 growth to 1.5% from
1.6%. Inflation previously was projected to fall to 3.2% this year, but now is
seen near 2.7%, which incidentally is same as the ECB's December projection. The
EC's 2025 inflation forecast for the eurozone is 2.25, while the ECB's is 2.1%.
Earlier today, France's Finance Minister Le Maire cut the forecast for French
growth this year to 1% from 1.4%. To maintain the budget deficit target, he
also announced 10 bln euro in new spending cuts.
The euro has a three-week
rally in tow to start this week. In fact, it has risen in seven of the last nine sessions. It
posted its highest close of last week before the weekend. Still, it has failed
to close higher on a weekly basis since the second week of the new year, and
even then, it rose by less than 0.1%. We think the euro is forging a low and a
close above $1.08 would be constructive. We have identified a band of
resistance ($1.0810-30) and above there, a push above $1.0865 boost confidence
that a low in in place. It is in less than a fifth of a cent range today below
$1.0790. Sterling settled on a firm note ahead of the week, slightly
above $1.2600. The low was set after the soft CPI last Wednesday
(~$1.2535), but sterling shrugged off the disappointing GDP the following day
and closed higher on Thursday and Friday. Initial resistance is seen in the
$1.2635-50 area. Sterling has not closed above that band since the US
employment report on February 2. It has held above $1.2600 so far today, but
met sellers near $1.2630, a four-day high.
America
A key issue is whether the
firmer than expected CPI and PPI changed the Fed's outlook. We do not think so for four reasons. First,
the decision in March, May or June will not be determined by January CPI. Second,
the bar to boost the Fed's confidence was set low by Fed Chair Powell who said
good data was sought, not necessarily better data. Third, the price dynamics
suggest the PCE deflator will be more subdued. Fourth, the fall in retail sales
and industrial output warn that the real sector weakness at the start of the
year. Several Fed officials speak this week, and most will address the economic
outlook.
While monetary policy has
been very much focus, fiscal policy comes back to the fore. Specifically, the last continuing
resolution for authorizing federal government spending expires March 1 and
March 8. Many Republicans are opposed to another short-term resolution. However,
time is of the essence. The House of Representatives went on recess last week
and do not return until February 28. The Senate is taking off this week, and
when it returns, the first order of business will be to hear the impeachment
case against Homeland Security Secretary Mayorkas (impeached by the House of
Representatives by a 215-214 vote).
After pulling back from the
CPI-inspired rally to CAD1.3585 high 2024 high, the US dollar found support
before the weekend near CAD1.3460. It settled near CAD1.3485. It has held below CAD1.3500 today and
has been in a narrow range mostly below CAD1.3490 and above CAD1.3470. Nearby
resistance is around CAD1.3520 and then in the CAD1.3540 area. Canada reports
January CPI tomorrow, and with the holiday in the US today, there is even more
reason to look for a consolidative session. The greenback recorded last
week's low ahead of the weekend slightly below MXN17.03. It is holding
barely above there today, while staying below MXN17.07 in quiet
turnover. On February 5-6, the US established a range of slightly below
MXN17.01 and about MXN17.28. It continues to work the range. In the week
through last Tuesday, February 13, speculators in the futures market boosted
their net long peso position by 13k contracts, the most since the end of last
November, to almost 100.5k contracts (500k pesos per contract, or ~$29.3k),
which is the largest since mid-March 2020. Since the end of last October, the
bulls have been amassing a large gross long peso position, with the exception
of two reporting week. The bears had been extending their gross short position
too. And for the fourth time since the end of last October, the bears covered
last week. The 10k contracts covered was the most since last June and
represents almost an 18% reduction of the gross short position, the most in
absolute and proportional terms since last June.
Reviewed by Marc Chandler
on
February 19, 2024
Rating:
