Overview: There is a nervous calm in the foreign exchange market. The Federal Reserve indicated that the relatively good economic performance allow is to bide its time for the economic and policy picture to clarify and policy remained "meaningfully" restrictive. The disappointing GDP figures from Germany, France, and Italy today provide a weak backdrop for the ECB, which is set to deliver a quarter-point cut. The BOJ signaled its commitment to continue to lift rates if the economy proceeds as expected. The US tariff threat for February 1 looms large, but the continued resilience of the Mexican peso suggests they may not materialize now. Indeed, the US may choose to recognize the measures Canada and Mexico have already taken to declare victory. Among the G10 currencies, only the yen and Canadian dollar are resisting the greenback. Among emerging market currencies, Asia and the Mexican peso stand out, while central European currencies are mostly lower.
European bond yields are 5-7 bp lower, while the 10-year US Treasury yield a couple basis points lower to probe the 4.50%, which seems to be a possible base being formed, perhaps ahead of next week's refunding announcement and employment report. Equities are mostly higher. Many of the large market in the Asia Pacific region are still on holiday, but Japan, Australia, and India equities advanced. Europe's Stoxx 600 is up nearly 0.5% to extend its rally into the third consecutive session. US index futures are firm. Gold has recovered from the pullback earlier this week and is near $2780. The record high in the cash market from the end of last October was near $2790. Meanwhile, March WTI made a marginal new low for the year today near $72.00, which is also where the 200-day moving average is found.
USD: The Federal Reserve left its policy rate steady, and the accompanying statement recognized that inflation remains elevated and upgraded its assessment of the labor market to "solid" (from unemployment "remains low"). The overarching tone was one of patience, and there is plenty of data and time for political developments ahead of the FOMC's next meeting, March 19. Today offers the first official estimate of Q4 GDP. The Atlanta Fed's tracker puts it at 3.2%, while the median in Bloomberg's survey is for 2.7%. Yesterday's larger than expected advanced goods deficit for December warns of a potential drag. Weekly jobless claims may be overshadowed by the GDP report and anticipation of next week's January nonfarm payroll (early forecasts are for around 150k). The Dollar Index extended its recovery to almost 108.30 yesterday which is slightly beyond the (38.2%) retracement of the pullback from the month's high from January 13, near 110.20. The next retracement (50%) is near 108.55, but it is consolidating quietly so far today between about 107.80 and 108.00.
EURO: With its latest losses that took the euro to nearly $1.0380 yesterday, the euro retraced a little more than a third of the bounce from around $1.0180 on January 13, its lowest level since November 2022. A break of $1.0355 targets the next retracement (61.8%) near $1.0315. The $1.0450-60 area may offer the nearby cap. The outcome of the ECB meeting will be known shortly, but there is little doubt that it will cut key rates by 25 bp after four quarter-point cuts last year. President Lagarde is unlikely to push against expectation for another cut at the next meeting on March 6. The swaps market has 75 bp of cuts discounted in H1 25 and favors another cut in the fourth quarter. Meanwhile, the first estimate puts Q4 GDP disappointed. It was flat in Q4 after Germany, France, Italy results were poor. The German economy contracted by 0.2%. A smaller contraction was expected. The French economy was expected to have stagnated, but output fell by 0.1%. Italy's economy % expansion was flat for the second consecutive quarter.
CNY: The dollar is recording a higher low against the offshore yuan for the fourth consecutive session today, but the tone remains consolidative. It continues to be confined to Tuesday's range (~CNH7.2585-CNH7.2860), which is within the range set last Friday (~CNH7.2345-CNH7.2880). When the onshore yuan trading stopped on Monday the extended Lunar New Year holiday, the dollar was near CNH7.2445.
JPY: The dollar remains within Monday's range against the Japanese yen (~JPY153.70-JPY156.25). Lower highs are being recorded for the fifth consecutive session today and both the five-day and 20-day moving averages are gently falling. The BOJ Deputy Governor Himino underscored the central bank's hawkish message, drawing attention to the still-negative real rates. The message continues to be if that Japanese economy evolves as officials expect, rates will be lifted further. Until today, despite some intraday penetration, JPY155 has only yielded once a closing basis this month (Monday). Initial resistance now may be near JPY154.75. Japan reports a bevy of data tomorrow: employment (unemployment steady at 2.5%, Tokyo CPI (little changed), industrial production and retail sales (both like a little softer).
GBP: Sterling has been more resilient in recent days than most of the G10 currencies. It has not met the minimum (38.2%) retracement of the recovery from the January 13 low near $1.21. That retracement is found near $1.2360. In fact, leaving aside the marginal new high set Monday near $1.2525, cable has been confined to last Friday's range (~$1.2350-$1.2500) and remains so today. It is holding below yesterday's high (~$1.2465) in a narrow band to about $1.2430. The UK reported consumer credit (in line with expectations) mortgage data (stronger than expected), and money supply (small increase), none of which capture the market's attention for long. The Bank of England meets on February 6 and the swaps market has a quarter-point cut nearly fully discounted, and another cut around mid-year.
CAD: The US dollar initially pullback back from about CAD1.4460 to CAD1.4420 around the central bank's quarter-point rate cut. It chopped in that range until the greenback fell into the European close amid what appears to be position squaring, which sent it to almost CAD1.44. It quickly returned to its earlier range. It is trading quietly between about CAD1.4395 and CAD1.4435. The Bank of Canada dropped its guidance on further moves, while acknowledged the "substantial" 200 bp of easing since last June and warning that the US tariff threat is "clouding the economic outlook." In its updated forecasts, the Bank of Canada saw CPI at 2.1% at the end of Q1 25. It was 1.8% in December 2024. Expectations reflected in the swap market for the next meeting (March 12) were little changed with about a 40% chance of a cut discounted. Subjectively, we would put the odds a bit lower.
AUD: The Australian dollar fell for the third consecutive session yesterday and is threatening to extend it today. It has pulled back nearly 2% from last Friday's high (~$0.6330). It found new bids near $0.6210. It is holding today/ Initial resistance is now seen in the $0.6250 area. Today's import/export price indices, and tomorrow's PPI and private sector credit ae unlikely to have much impact. The general direction of the US dollar and the market's conviction that the RBA's easing cycle will begin in a few weeks are more important. The futures market has about 85 bp of easing discounted for this year. It was slightly more than 60 bp when the Aussie bottomed on January 13.
MXN: The dollar jumped from the session low yesterday (~MXN20.47) to the high (~MXN20.6650) in a little more than 90 minutes in the North American morning yesterday. However, dollar sellers re-emerged that pushed it back toward session lows. The greenback is trading at three-day lows in European turnover, near MXN20.44. Monday's low was slightly below MXN20.33. At her regular press conference, President Sheinbaum suggested that she did not expect US tariffs to be implement on February 1, but that they will be forthcoming. Mexico reports Q4 GDP today and a small contraction is expected, the first since Q3 21. The central bank meets on February 6. A few economists, participating in Bloomberg's survey, see scope for a 50 bp cut, which would bring the target rate to 9.5%. The swaps market sees 150 bp of cuts over the next 12 months.
Reviewed by Marc Chandler
on
January 30, 2025
Rating:
