Overview: The dollar is trading with a
slightly heavier bias as some of its recent gains are pared. Sterling has moved
back into the $1.26-$1.28 trading range that dominated since the middle of last
December until the start of this week. The euro is also trading a little firmer
despite another large drop in German industrial output (-1.6%). The Japanese
yen, Swiss franc, and Norwegian krone are the notable exceptions with a softer profile.
Emerging market currencies are mostly firmer. Yet, the lower yielding
currencies G10 currencies are trading softer, among emerging market currencies
today, the high yielding ones are trading lower. These include the Turkish
lira, South African rand, and the Hungarian forint.
Asia Pacific equities mostly
advanced, led by South Korea's Kospi, which itself was powered by Samsung. China's
Shanghai and Shenzhen composites rose by nearly 1.5% and the MSCI Asia Pacific
Index rose to a new five-week high. Europe's Stoxx 600 is slightly lower after
advancing 0.6% yesterday. It is hovering near its best level in two-years. US
index futures are narrowly mixed. Benchmark 10-year yields are mostly 1-2 bp
higher in Europe, though the 10-year Gilt yield is up five basis points,
perhaps reflecting a soft reception to the three-year auction after demand
yesterday at the 30-year sale was the most in four-years. The 10-year US
Treasury yields is up a couple of basis points to 4.12%. It settled last week
near 4.02%. Gold is trading quietly, and it remains in the range set Monday
(~$2015-$2042). March WTI is edging higher today and reached a three-day high
near $74. The two-and-a-half week low was set on Monday around $71.40.
Asia Pacific
There are two main talking
points in what is a quiet day for high-frequency economic data in the region. The first is what appears to be a new
economic divergence favoring the US. This has encouraged the market to push out
the first Fed cut and to reduce the likely amount of easing this year. The rise
in US Treasury yields appeared to drag up European rates as well. The second
issue is Beijing's efforts to stabilize the stock market are the recent rout.
There is not much of a doubt that China, like other large countries, has ample
resources to support the currency and equity market. Consider how much ink has
been spilled on the so-called Fed's put. In Politics
and Markets, political scientist, Charles Lindblom compared the
coordination of market with thumbs and political coordination with fingers.
China appears clumsier and cruder, and the different institutional settings
allow for different policy options. The Federal Reserve does not buy equities
but the Bank of Japan, according to Bloomberg, has acquired around 80% of
Japan's equity ETFs, which account for around 7% of the country's roughly $6
trillion stock market. The BOJ reportedly in the top-10 shareholders in about 90%
of the Nikkei 225.
Tomorrow, China reports
January CPI and PPI. Deflationary
forces likely remain intact. China's consumer prices have been dragged down by
food prices, which does not seem like a demand issue. Non-food prices have
risen slightly over the past year. Producer prices falling (below zero) since
October 2022. The bottom was reached last June at -5.4% year-over-year. PPI was
-2.7% in December and likely remained in the -2.5% to -3.0% range seen over the
past five months. India's central bank also meets tomorrow. Steady policy is
expected. The central bank last lifted the repo rate in February by 25 to
6.50%. It bottomed 4% this cycle. India's December CPI was near 5.7% and the
January figure is due next week. A rate cut around the middle of the year
appears priced into the swap market. Amid strong foreign demand, India's
10-year bond yield has fallen by almost 10 bp this year to around 7.08%. Strong
foreign interest in Indian equities has also been reported, though the leading
indices are little changed. On the other hand, the rupee is the only emerging
market currency that has managed to eke out a gain against the dollar, albeit
minor (~0.30%).
The biggest drop in the US
10-year yield since last week's FOMC meeting (~7 bp) dragged the dollar lower
against the yen yesterday. The
greenback was turned down from around JPY148.80 and fell to almost JPY147.80 in
the North American afternoon. It nearly met the (38.2%) retracement of the
rally from last week's low (~JPY145.90) at JPY147.75. The low since the initial
reaction to the US jobs data was near JPY147.70 was tested today. If the dollar
has put in a near-term peak, we suspect it should hold below the JPY148.40
area. The Australian dollar briefly traded fractionally above Monday's
high, which also corresponds to the (38.2%) retracement of the sell-off since
the US employment data. The $0.6525 area is also the neckline of
the large head and shoulders bearish technical pattern. In such a pattern it is
not unusual to break the neckline and come back to test it. The next
retracement (50%) level is near $0.6540, which the Aussie tested today before coming off. The dollar slipped to a three-day low against the Chinese yuan. After being
turned back from near CNY7.20 on Monday, the greenback fell about CNY7.1825
earlier today before recovering to CNY7.1950. The PBOC set the dollar's
reference rate at CNY7.1049 (CNY7.1082 yesterday). The average in the Bloomberg
survey was for CNY7.1858 (CNY7.2025 yesterday).
Europe
Germany's 8.9% surge in
factory orders in December, the largest since the jump in May-June 2020, failed
lift industrial output, which has been not risen since last April on a monthly
basis. The 1.6% drop was
three-times larger than expected, and overall output is at its lowest since
June 2020. The drop in December was led by chemicals and construction. Last
week, France reported a 1.1% jump in its December industrial production led by
a 1.2% rise in manufacturing output, the largest increase since February 2023.
Recall that France's December manufacturing PMI fell to 42.1, a new cyclical
low from 42.9 in November 2023. Spain reported a 0.1% decline in its December
industrial production after a 1.0% jump in November. Italy will report is
numbers on Friday and the median forecast in Bloomberg's survey calls for a
0.9% increase after a 1.5% fall in November. The aggregate estimate for the
eurozone is due on February 14, at the same time as revised and details for Q4
23 GDP are due. The preliminary estimate was unchanged.
France reported its December
trade figures today. The
shortfall was 6.8 bln euros. The average monthly deficit in 2023 was about 8.4
bln euros. In 2022, the average monthly deficit was about 13.5 bln euros.
Before Covid, in 2019, the average monthly trade deficit was 4.8 bln euros.
Germany reported a 22.2 bln euro trade surplus in December earlier this week.
It was the largest monthly surplus since November 2017. The average monthly
German surplus in 2023 was 17.5 bln euros after 7.1 bln average in 2022. In
2019, Germany's average monthly trade surplus was almost 19 bln euros.
The euro was confined
yesterday to less than half-of-a-cent range above Monday's low for the year
slightly below $1.0725. In Europe and North America, the euro was unable to take out the
high set in the Asia Pacific session on Tuesday slightly above $1.0760. Again,
traders in the Asia Pacific region bought the euro and it reached almost
$1.0775. The $1.0790-$1.0810 area may offer formidable near-term resistance.,
but the euro's upticks look tenuous. Initial support is seen around
$1.0740-50. Sterling broke out of the $1.26-$1.28 trading range on
Monday and fell to about $1.2520. Sterling re-entered its previous
range yesterday but settled slightly below it. Follow-through buying has lifted
to around $1.2635 today in the European morning. Stronger resistance is likely
in the $1.2645-75 area, but intraday momentum indicators are stretched.
America
The US and Canada report
December trade figures today. In an earlier era, the US trade balance was the key monthly
report. However, economists appear to have gotten better at forecasting it, and
an advanced estimate of the merchandise balance is also published. The trade
balance hardly causes a ripple these days. In calculating Q4 GDP, an assumption
was made for the December trade balance, which is likely a recent average as a
place holder. The shortfall averaged about $65.3 bln a month through November
and $62.9 bln in the last three months of data. In 2022, the average monthly
deficit was almost $71.2 bln. In 2019, before Covid, the average monthly
deficit was $41.6 bln. To be sure, these are nominal numbers, reflecting both
quantities and prices. The broader measure, the current account deficit was
2.1% of GDP in 2019 and likely a little above 3.0% of GDP last year.
In 2022, Canada reported a
monthly merchandise trade surplus of C$1.6 bln. In 2019, before Covid, the average
monthly deficit was nearly as big as the surplus. Last year's
trade surplus has also but disappeared. The average monthly goods surplus
through November was about C$400 mln. Canada's current account deficit may have
widened slightly last year to around 1% of GDP from about 0.4% in 2022
Canada's trade figures, like the US's, typically hardly moves the market.
Canada reports January jobs data on Friday. The market may be more sensitive to
it than the December's trade balance. Recall that Canada lost 23.5k full-time
position in December, the most since May 2023. This probably overstates the
weakness in the Canadian labor market and a recovery seems likely in January.
The US dollar held to the
tick, according to Bloomberg, Monday's high against the Canadian dollar
slightly below CAD1.3545. The greenback trended low in Europe and North America yesterday to
reach almost CAD1.3475 and made a marginal new low toward near CAD1.3470. That
houses the 200-day moving average and the (38.2%) retracement objective of the
rally from last Friday's low (~CAD1.3435). The US dollar is trading between two
set of options that expire today. The first is at CAD1.35 for about $975 mln
and the other is for about $557 mln at CAD1.3465. The greenback
continued to retreat yesterday from Monday's high around MXN17.28. But
the bears hesitated yesterday and today as MXN17.00 neared. This is the lowest
dollar level in three weeks. The big events of the week are tomorrow:
January CPI (headline rate is seen rising while the core rate falls) and the
central bank meeting. A rate cut is coming, but not quite yet, is the general
consensus.
Reviewed by Marc Chandler
on
February 07, 2024
Rating:
