Holiday Moves Continue to be Unwound

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Marc Chandler
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Overview: The dollar is firm. Rates are mostly higher and equities lower. The moves scored in the holiday-thin markets are at end of last year are being unwound. This does not appear complete yet. Geopolitical tensions remain high but do not seem to be having a direct market influence as both gold and oil are trading lower. Among the G10 currencies, sterling has been the most resilient today but nearly flat. Within the emerging market complex, the Hungarian forint and Philippine peso are bucking the trend that has seen most of the emerging market currencies ease. Gold is down for the fourth consecutive session, which if sustained, would be the longest losing streak in more than two months. February WTI's dramatic downside reversal yesterday (from nearly $73.65 to $70.05) saw follow-through selling today that pushed it to almost $69.25, its lowest level since the December 13 low (~$68).

Asia Pacific equity markets extended Tuesday's decline, though the Shanghai Composite eked out a small gain. China's CSI 300 finished nearly 0.25% lower. Europe's Stoxx 600 is off about 0.50% near midday and US index futures are pointing to modest losses. The 10-year US Treasury yield is up about four basis points to 3.97%. The two-year yield is up three basis points to 4.35%. European benchmark yields are mostly a little firmer, but German and French yields are slightly softer. The US sees the ISM manufacturing survey, JOLTS, and later in the session, the December FOMC minutes. December auto sales will be reported throughout the day.

Asia Pacific

Japanese markets re-open tomorrow. The country is coping with the aftermath of the earthquake and airplane accident. The final December manufacturing PMI is unlikely to be much different than the preliminary 47.7 reaching, which matches the low for 2023. China's Caixin services and composite PMI is also due. After the small upside surprise on the manufacturing PMI, and if the services PMI ticks up as expected, the composite may rise for the second consecutive month. Australia's final composite December PMI's preliminary bounce to 47.4 from 46.2 may be revised lower after the softer manufacturing PMI.

The BRICS expanded by five new members this week, Saudi Arabia, UAE, Iran, Egypt, and Ethiopia. Argentina was to join, as well, but the new government has declined the invitation. It is a club but is it a bloc? What will they do together? They have launched a bank, but most of the loans are not in the member currencies. Last year, reports highlighted Russia's reluctance to accept more Indian rupee for oil. India devised some financial products for Russian investors, but Moscow preferred other currencies, including the UAE dirham, which like the Saudi riyal, is pegged to the dollar. Indian oil imports from Russia last month were the least since the start of 2023. An estimated five ships with crude cargo had been "parked" off the India and the payment dispute is thought to have prompted the ships to move away from India. There is some speculation that they will head toward China, where Beijing has announced the 2024 oil import quotas that nearly match all last year's approvals (~3.6 mln barrels a day). Note that China's large state-owned refiners are not subject to import limits and that additional import permissions are expected as the year progresses. In 2023, a second batch of quotas (~55% of the initial quota) was issued in June and a third, albeit smaller quota (~8.5% of the first quota) was issued in October. Separately, China reimposed import levies on coal that work against Russia's interest. Beijing's policy has shifted from avoiding supply disruptions, which resulted into the removal of the tariffs after Russia's invasion of Ukraine, to protecting Chinese miners from the glut that results from last year's record domestic output. Russia is China's second-largest coal supplier after Indonesia. China imposes no tariffs on coal from Indonesia and Australia, where there are free-trade agreements in place. The new tariff, which will apply to Russian coal is 6% for power and 3% for coking coal used to make steel. 

The dollar recorded yesterday's high early in the North American session yesterday near JPY142.20. It consolidated most of the session a little below JPY142.00. The gains were extended to about JPY142.80 today. There is a nearby band of resistance that is found between JPY142.85 and JPY143.20. It may be partly a function of how much US rates back up after falling sharply into the end of last year. Japanese insurers may be US Treasury sellers as they may repatriate funds to cover claims from the earthquake and tsunami. The Australian dollar broke down in the North American session and settled at a nine-day low near $0.6765. Follow-through selling today has seen the Aussie fray support near $0.6745. There are options for about A$527 mln at $0.6720 that expire today, while the next technical target is $0.6700 and then $0.6665. The news stream is light, and the Aussie's decline looks more like unwinding the recent gains amid the greater risk-off mood. The greenback reached CNY7.1535, its highest level since December 13. Recall that the dollar gapped lower on December 14. The top of the gap is the low from December 13 (~CNY7.1710). That seems to be the near-term technical target. The PBOC's set the dollar's reference rate at CNY7.1002, up from CNY7.0770 yesterday. The average projection in Bloomberg's survey was CNY7.1467.

Europe

The eurozone and UK economic diaries are quiet today but pick up tomorrow with the final December PMI readings. The UK will also report consumer credit and mortgage lending figures for November tomorrow. The eurozone finishes the week with the preliminary December CPI, where the base effect points to a countertrend increase.

Switzerland returned from its long New Year celebration, and it was greeted with an uptick in the December manufacturing PMI. It rose to 43.0 from 42.1, a three-month high. It is the fourth gain in five months, suggesting that the worst may be past but that the growth impulses remain poor. Recall that last week, amid the elevated tensions in the Red Sea and Russia's intense attacks on Ukraine, the dollar fell to its lowest level since 2015 against the Swiss franc (~CHF0.8335). It reached almost CHF0.8510 yesterday and has edged a little higher today. A move above CHF0.8525 may target the CHF0.8580-CHF0.8635 area.

The euro peaked on December 28 nearly $1.1140, up from about $1.0725 seen with the US November employment data on December 8. The pullback extended to almost $1.0940 yesterday, and today has fallen to about $1.0925, through the 20-day moving average (~$1.0945) and meeting the (50%) retracement of the rally. The next retracement target (61.8%) is near $1.0885. Last year's low was set in early October around $1.0450. The $1.0875 area corresponds to a (38.2%) retracement. Sterling broke down and settled below its 20-day moving average (~$1.2665) for the first time in three weeks. It could prove to be resistance now. The session high, so far today, has been just shy of $1.2655. Sterling reached almost $1.2610 yesterday and this area held today. The next area of technical support is seen near $1.2575. 

America

Yesterday's unexpected downward revision to the US December manufacturing PMI (47.9 from 48.2 preliminary estimate and 49.4 in November) may warn of downside risks with today's manufacturing ISM. However, in the 11 months of last year which there is data for, the two surveys moved in the same direction six times and deviated the other five. This is to say, that knowing the manufacturing PMI may not help one anticipate the direction of the manufacturing ISM. Still, they both point to a weak manufacturing sector. Except for April 2023, the PMI has been below the 50 boom/bust level since November 2022. The same is true for the ISM but it did not share that April exception. The median forecast in Bloomberg's survey has the manufacturing ISM edging up to 47.2 form 46.7. It true, would be the highest reading since last February. The US also sees the November JOLTS report and economists look for the first gain since August. The number of job openings fell to 8.73 mln in October from nearly 9.5 mln in August. December auto sales will be drip-fed to the markets throughout the day. Aggregate, seasonally adjusted annualized sales are expected to have bounced back after two months of declines. US auto sales through November are up nearly 12% from the year ago period. November sales were about 8.5% above November 2022 sales. December 2022 vehicle sales were particularly poor at 14.14 mln (SAAR) and the Bloomberg median estimate of 15.5 mln would represent an almost 16.5% increase.

The FOMC minutes from last month's meeting may draw closer scrutiny that usual. On the eve before the meeting's conclusion, the Fed funds futures discounting about a 42% chance of cut at the March 2024 meeting. Shortly before Christmas, the futures had a quarter point fully discounted plus a little more. A March cut after delivering the last hike in July is within the normal range but given the questions about its anti-inflation credentials after a slow end to the QE and start of the tightening cycle, coupled with something near trend growth in Q4 23, the market seems overconfident. At its peak, the market had about 160 bp of rate cuts discounted for this year. It is now 150 bp. Before the Fed met last month, the market was already discounting slightly more than 100 bp of cuts this year. The median projection by the Fed officials was for three cuts. A common narrative is that the Fed will cut the Fed funds rate but frame it so that it is not easing policy as much as maintaining the current level of restriction in the face of falling inflation, the real rate. However, the real rate is elusive and cannot be measured directly. Reasonable people may differ in assessing the real rate. One simple way that seems to be what many are doing is subtracting inflation from the nominal rate, though nominal rates should be adjusted for inflation expectations rather than current inflation measures. Still, in July 2023, before the Fed's last rate hike, the average effective Fed funds rate was 5.08%. The CPI stood at 3.2%. The average effective Fed funds is now steady at 5.33% and the CPI was at 3.1% in November and may have risen back to 3.2% in December.

The US dollar rose by about 0.65% against the Canadian dollar yesterday, its biggest single-day advance since mid-October. The greenback approached CAD1.3335, and the (38.2%) retracement of the decline from the December 12 high (~CAD1.3620) is near CAD1.3345. The US dollar is in a narrow range today near yesterday's highs and there are options for a little more than $1 bln that expire today at CAD1.3340. The (50%) retracement is closer to CAD1.3400. The 20-day moving average is a little lower near CAD1.3380, which the US dollar has not closed above since mid-November. The greenback pushed higher against the Mexican peso and poked above MXN17.07, its highest level since December 21. It is holding slightly below there in quiet dealings today. Disappointing economic data did not help the peso in the face of a broadly stronger US dollar. The manufacturing PMI slipped (52.0 vs. 52.5) and the IMEF surveys were softer (with the manufacturing survey falling below 50 for the first time since May) and a sharp drop in November worker remittances (which are often seasonally weak). The dollar may have near-term potential toward MXN17.13-15.