Overview: The foreign exchange market is quiet. The
Lunar New Year holiday shut most Asian markets. That, coupled with the light
news in Europe, have served to keep the dollar in narrow ranges against the G10
currencies. The Swedish krona, Norwegian krone, and Japanese yen are posting
minor gains against the greenback. The New Zealand dollar, which was strongest
major currency last week (1.4%) is off by almost 0.5% today, making it the
weakest today. RBNZ Governor Orr underscored the recent message that inflation
is still too high (~4.7%). Emerging market currencies are narrowly mixed
(+/-0.2%). Of note, India reports December industrial production and January
CPI shortly.
The few equity markets in the
Asia Pacific region that were not on holiday today, including Australia, India,
and New Zealand slipped. Political uncertainty in Pakistan saw its stock market
tagged for 3%. On the other hand, Europe's Stoxx 600 is trying to snap a
three-day fall (less than 0.4%). Of note, real estate is the strongest sector
today, rising by more than 1%. US index futures are trading firmly after new
record-highs before the weekend. Benchmark 10-year bond yields are 3-6 bp lower
in Europe. The 10-year US Treasury yield is off a basis point to around 4.16%.
Gold is trading with a softer bias near $2020. Last week's low was around $2015.
April WTI set this month's high before the weekend near $77.15. It is
approaching the pre-weekend lows slightly below $76. Support is seen closer to
$75.
Asia Pacific
The top two BOJ officials
played down speculation that the central bank’s from negative interest rates
will signal the start of a tightening cycle, and for good reason. First, inflation is already well off its
peak and could easily fall below the 2% target before the April BOJ meeting
that is widely expected to adjust policy. Second, despite a shortage of
workers, (Japan's working age population peaked nearly 30 years ago) and the
gradual opening to foreign workers, wage growth continues to lag inflation. Third,
and related, domestic demand is soft. Toward the end of the week, Japan will
publish its initial estimate of Q4 GDP. Consumption is likely to have recovered
weakly from the contraction in Q2 and Q3 23. In the five years (20 quarters)
before the pandemic, Japan's private consumption component in its GDP contracted by
an average of 0.2% a quarter. Also, note that although the BOJ set the
overnight target rate at minus 0.10%, the effective rate at
the end of last week was 0.005%. Governor Ueda is determined to exit the
negative interest rate policy for technical and strategic reasons. Arguably,
there was windows of opportunity previously, where the macroeconomic setting
was conducive to exiting the negative policy rate.
Most Asian markets were
closed today, and China's mainland markets are closed all week for the Lunar
New Year holiday. We
expect that after the holiday, more efforts to support the economy and fight
deflation will be forthcoming. Despite the stimulus in H2 23, the economy does
not seem responsive. The assumption that the state-owned banks are just arms of
the government is challenged by the same banks not fully passing on the PBOC's
lower rates. The one- and five-year loan prime rates will be set on Feb 20. The
same state-owned banks have also been reluctant to lend to the property market
and enact the support measures Beijing unveiled in 2022. Lastly, consider the
offshore yuan. It does not have to but with few exceptions respects the onshore
band (2% for the dollar around the reference rate). Why? While the PBOC could
intervene there, but when it does it is fairly clear. The last reference rate
creates a band of ~CNH6.9640-CNH7.2485. Is it too much to suggest that the same
mechanism that keeps the offshore yuan within the onshore band explains a great
deal of how the PBOC manages the exchange rate? To paraphrase an old Chinese
saying, "kill an occasional chicken to scare the
monkeys."
The dollar edged a little
closer to the JPY150 level ahead of the weekend (~JPY149.60) before settling
virtually unchanged near JPY149.30. There are around $1.4 bln in options at JPY150 that expire
tomorrow. During the six-week decline in the yen, speculators in the futures
market have grown their net short yen position by more than 50% to 84k
contracts (~$7 bln). The greenback is a narrow range of about a third of a yen
above JPY149. The price action looks like a bullish pennant or flag, The
Australian dollar's range last week, roughly $0.6470-$0.6540, is the key to the
near-term direction. We favor an upside break and watching the
possible bullish divergence with some of the momentum indicators but recognize
the $0.6555-75 area to be an important hurdle. The Aussie eked out a small gain
last week (~0.20%), the first of the year. Speculators in the futures markets
added to their net short Australian dollar position for the fourth week in a
row. It now stands at about 71.8k contracts (~$7.2 bln), up from 32.3k before
the streak began. The Aussie is trading in about a fifth of a cent range above
$0.6510.
Europe
The European economic
calendar is light this week, and what there is, may be a sad reminder of the
Europe's sad state. Eurostat
will publish the details of Q4 23 GDP. The initial estimate had the regional
economy stagnating after a 0.1% contraction in Q3. The dramatic 1.6% drop in
Germany December industrial output (-3.0% year-over-year) underscores the lack
of growth impulses to start the new year, and the weakness of what had been the
European engine. At the same time, leadership is weak. Among the large members,
Italy's Meloni, right-government seems among the strongest, and incidentally,
the economy is doing better (but still not well). In 2022, Germany grew by 1.8%.
Italy grew twice as fast. Last year, the German economy contracted by 0.3%,
while Italy expanded by 0.7%. On the other hand, Italy's budget deficit was
about 5.4% of GDP last year, while Germany's was less than 2.5%. Italy's
10-year premium over German narrowed to about 140 bp at the end of January,
almost a two-year low, after rising to a nine-month peak last October over 200
bp. It is snapping back this month is near 155 bp. Italy's two-year premium
peaked near 95 bp in the middle of last October and fell to almost 45 bp late
last month. Last year's low was below 30 bp. It has jumped to about 65 bp now,
the most since last November.
The Swiss franc was the
strongest G10 currency in Q4 23 as dollar fell across the board. It rose 8.8% and so far, this year, the
franc has fallen by about 3.9%. The dollar approached the (50%) retracement
objective (~CHF0.8790). Above there is the 200-day moving average (~CHF0.8845)
and the (61.8%) retracement near CHF0.8900. The euro is recovering from
multiyear lows set against the franc in Q4 23 (~CHF0.9255). It traded up to
almost CHF0.9475 last month but pulled back to support near CHF0.9300 earlier
this month. There may be potential toward CHF0.9500-CHF0.9550. Switzerland
reports January CPI tomorrow. The EU harmonized measure is expected to slip to
2.0% from 2.1%. Its own measure is seen easing to 1.6% (from 1.7%) and the
core rate to 1.4% (from 1.5%).
The euro reached a six-day
high late in thin Asia Pacific turnover near $1.0805. It was quickly sold to almost $1.0765
before finding a bid in early European turnover. It is the fourth session of
higher highs. The pre-weekend low was almost $1.0760, and a break of the
$1.0755 area would weaken the fragile technical tone. There are options for
about $755 mln euros at $1.08 that expire today. There are large (1.4-1.5 bln euros)
at $1.07 that expire tomorrow and Wednesday. Stiff resistance is seen in the
$1.0830-40 area. Sterling recovered after breaking down at the start of last
week (~$1.2520) but settled back into the $1.26-$1.28 trading range in the past
three sessions. The $1.2640 area had capped but, like the euro, set a
new six-day high before Europe opened and took sterling down to almost $1.2615.
Before the weekend, sterling briefly frayed the $1.26 level. It is an important
week for UK data, including the labor market report tomorrow and the January
CPI on Wednesday. Soft data may encourage bringing forward the first rate cut
to June from August.
America
Interest rates and
expectations are a key force driving exchange rates. The market has gradually reduced the odds
May rate cut to about 73% from 90% chance after the strong January jobs growth.
It also scaled back the magnitude of Fed cuts by about 50 bp (to ~112 bp) in
the past month. Tomorrow's CPI, more than last week's historic revisions, is a
key input into the Fed's reaction function. Fed Chair Powell recently indicated
the central bank was looking for more confirmation that inflation was on a
sustained path back to its target. The January figures will give the Fed that. Ahead
of it, the results of the NY Fed's inflation survey are of little consequence.
Canada reported a loss of
full-time jobs in January for the second consecutive month. Wage growth slowed. The decline in the
unemployment rate to 5.7% (from 5.8%) can be explained by the decline in the
participation rate (65.3% vs. 65.4%). The takeaway is that the market boosted
the chances of a June rate cut (to ~77% vs. ~67%). Despite the risk-on mood,
which lifted the S&P 500 to a new record high, the Canadian dollar found no
traction. It fell slightly for the first time in three sessions. The US dollar
made session highs near midday in NY ahead of the weekend near CAD1.3480. The
greenback is in a narrow 20-tick range above CAD1.3450 so fat today. Nearby
resistance is seen in the CAD1.3500 area but the greenback has been turned back
from the CAD1.3540 area three times. There are options for about $630 mln at
CAD1.35 that expire tomorrow. The Mexican peso weakened after the central
bank seemed to prepare the market for a rate cut as early as next month. However,
it recovered and returned to pre-central bank levels near MXN17.08. It has
edged low today to MXN17.0640. MXN17.00 was tested early last week. Around $580
mln of options expire there on Thursday. The US dollar reached BRL5.0175 at the
start of last week. On the pullback, it found support near BRL4.95. It settled
last week just above there. There is a band of technical support between
BRL4.91 and BRL4.93.
Reviewed by Marc Chandler
on
February 12, 2024
Rating:
