Greenback Consolidates Two-Day Surge

Overview: The US dollar is consolidating its the two-day surge since the jobs data at the end of last week. The Reserve Bank of Australia did not rule out additional rate hikes, and although the derivatives markets do not think it is likely, the Australian dollar is the best performer in the G10 today with a small gain. An unexpectedly strong German factory orders report failed to help the euro much and it languished near yesterday's low. Sterling finally broke out of its $1.26-$1.28 range and is also moving sideways in a roughly $1.2530-65 range.

Signs that Chinese officials are stepping up their support for the equities saw the CSI 300 jump around 3. 5% and the Hang Seng surged by a little more than 4%. Among the large markets, Japan, South Korea, and Australia fell. Europe Stoxx 600 is flat to firmer and US index futures are narrowly mixed. European benchmark 10-year yields are mostly around a basis point higher, while the US 10-year Treasury yield is practically flat near 4.16% and the two-year yield is off a couple of basis points to 4.54%. The US quarterly refunding begins today with $54 bln three-year notes on sale. Gold is consolidating in a narrow range around $2025, yesterday's settlement. March WTI is trading quietly in the upper end of yesterday's range near $73.

Asia Pacific

It seems more than ironic that so many observers have underscored the problems of China's real estate market, which indeed is real, while the US commercial real estate woes drove down the US regional bank share index by 7.2% last week alone, the most in eight months. At the same time, China is faulted for weak consumption, though on a per capita basis it has more than doubled in the past ten years and (according to their figures rose 7.2% in 2023), while Japan's household spending has fallen for the past five years, including, as we learned earlier today a 2.5% decline in December on a year-over-year basis (vs. -2.0% median forecast in Bloomberg's survey). On a month-over-month basis, household spending fell by 0. 9%. One of the factors that is depressing Japanese household spending is the wages have not kept pace with inflation. Real labor earnings have also fallen for five consecutive years, including the 1.9% year-over-year decline reported earlier today for December 2023 (-1.5% expected). Excluding bonuses and overtime, base pay rose 2% year-over-year.

As widely expected, the Reserve Bank of Australia left is cash target rate unchanged at 4.35%. Despite the weakening of the economy and moderating price pressures, it was too early to reverse last November's quarter-point hike. In fact, the RBA kept the door ajar to further tightening. The updated forecast show that officials expect core inflation to return to the midpoint of the 2%-3.0% target range in 2026 (trimmed mean measure was at 4.2% in Q4 23). The market sees a later start and a less aggressive path of RBA easing than most of the G10 central banks. The futures market now has the first cut fully discounted in September, but has it almost priced in for August. The market now is pricing in about 50 bp of cuts this year down from almost 70 bp at the end of last year.

The dollar set a new high for the year in North America yesterday near JPY148.90. It has held below JPY148. 80 today. We had seen resistance near JPY149.20. The 10-year US Treasury yield has risen by around 37 bp since the post-FOMC low last Thursday (4. 80%). It has approached 4. 20%, which capped it last month. Similarly, the two-year yield spiked to 4. 48% last month. We thought the high could be closer to 4.55%. Lower US yields today have seen the greenback consolidate. It has held above JPY148.35. Initial support is near JPY148.25 and then around JPY147.70. The Australian dollar was sold to about $0. 6470 near the end of the European session yesterday, which took out the lower Bollinger Band (~$0.6485). It settled slightly in the band. We saw chart support closer to $0.6450. The Aussie recovered to about $0.6520, stopping shy of yesterday's high near $0.6525. We suspect North American participants will try again. The Chinese yuan is trading higher for the first time in three sessions, helped by the dollar's broader stability and s sharp jump in Chinese 10-year bond yield (six basis points, the most in seven months, to 2. 45%) and a surge in equities. A Chinese sovereign wealth fund indicating it would expand the range of its equity holdings and ETFs. The PBOC set the dollar's reference rate at CNY7.1082 (CNY7.1070 yesterday). The average in Bloomberg's survey was for CNY7.2025 (CNY7.2053 yesterday).

Europe

Aggregate eurozone retail sales fell by 1.1% in December and were off 0.8% year-over-year. It was the second consecutive decline in the monthly reading, while the year-over-year reading has not been positive since September 2022. It was in line with expectations after Germany disappointed with a 1.6% drop (the median forecast in Bloomberg's survey was for a 0.6% gain, though note that what was a November collapse of 2.5% was revised to -0,8%. Separately, the smallish 0.3% increase in November was revised away but German factory orders were surged by 8.9% in December. Major orders were the key, without which orders would have fallen by 2.2%, but they seemed to be widespread. Domestic orders jumped 9. 4% and foreign orders by 8.5%, with eurozone orders surging by 34.5%. The eurozone orders were largely for capital equipment (72.3% increase), while domestic orders for intermediate goods rose by 14.7% and by 12.8% for consumer goods. This may have supported industrial production, which is due tomorrow. German industrial output has not increased since last April. Germany's manufacturing PMI has been below 50 since June 2022, but the pace of contraction has slowed. Last month, it weas at 45.5, reflecting six months of improvement from 38.8 last July. Still, with Q4 23 GDP out in late January (-0.3% quarter-over-quarter) the factory orders and industrial production data might not be adding much to the information set of market participants and policymakers.

The euro took out the December low yesterday by 1/100 of a cent, according to Bloomberg. It settled below its lower Bollinger Band (~$1.0760) for the first time since last October. It recovered into the Bollinger Band (~$1.0735) but has slipped below it in the European morning. A break of $1.0700 would target the $1.0660 area initially and then the $1.06 area. However, with stretched intraday momentum indicators, we look for the euro to consolidate and show a firmer profile in North America today. Sterling finally and convincingly broke out of the two-cent trading range that framed the price action since mid-December. It reached roughly $1.2520 before exhausting the immediate selling pressure. That met the (38.2%) retracement objective of the Q4 23 rally. We peg initial support near $1.2500. The next retracement (50%), though, is near $1.2430. It settled below the 200-day moving average for the first time since mid-November, and well below the lower Bollinger Band ($1.26). It is still below the Bollinger Band (~$1.2570) and was stopped near the 200-day moving average ($1.2565).

America

The Fed's Powell has repeatedly explained that while there is a single number that captures inflation (PCE deflator), it is more difficult to quantify full employment. For that, the Fed looks at several measures. Some who continue to play up the risk that the US is in a recession or headed for one were not dissuaded by the January employment report. Nevertheless, the broader context would seem to concur with the Fed's assessment that "Job gains have moderated since early last year but remain strong, and the unemployment rate has remained low." Seemingly underscoring that point was the jump in the ISM services employment sub-index to 50.5 from a revised 43.8 in December.

Four regional Fed officials are scheduled to speak today, but Cleveland Fed's Mester is the only voter this year on the FOMC (the others are Kashkari, Collins, and Harker). Tomorrow, Governors Kugler and Bowman speak. Richmond Fed's Barkin, who votes on the FOMC this year, will also speak. Boston Fed's Collins also speaks again. Meanwhile, the US Treasury's quarterly refunding kicks off with $54 bln three-year notes. We suspect that the more than 25 bp backing up of rates since the end of last year will help facilitate a smooth auction. Given the $65 bln 10-year maturities that on February 15, including almost $20 bln at the Fed, Wednesday's $42 bln 10-year note auction may also be taken up. It is the $25 bln, 30-year bond auction on Thursday that may be the most difficult. There is no maturing issue this quarter. The results may reflect the appetite to increase duration.

The US dollar made a marginal new high for the year against the Canadian dollar is it rose a couple of hundredths of a cent above the January high to reach almost CAD1.3545. The upper Bollinger Band was frayed (~CAD1.3540), it settled on it. Today, it comes in closer to CAD1. 3555. The next upside target is the CAD1.3600-25 area. Canada reports December building permits and the Ivey PMI. Neither will likely outweigh the general risk appetite and broad movement of the US dollar on the exchange rate. The US dollar found support in early European turnover in front of CAD1.3500. The greenback held slightly below last week's high against the Mexican peso (~MXN17.2855) and reversed lower yesterday. It fell to MXN17.0875, which was the lowest it has been since the initial reaction to the US employment data before the weekend. It made a marginal new low in the early European turnover near MXN17.0755. Recall that last week's low was near MXN17.0380. Only the Mexican peso and Russian ruble, among emerging market currencies, managed to rise against the US dollar yesterday. On Thursday, Mexico report January CPI a few hours before the central bank meets. The overnight rate is seen steady at 11.25%, making the combination of carry and relatively low volatility attractive.

Disclaimer