Fragile and Consolidative Tone Starts the Week in FX

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Marc Chandler
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Overview: The US dollar has begun the new week consolidating in a mixed fashion against the G10 currencies. Bank of Japan Governor Ueda remains circumspect and did not provide guidance about next month's central bank meeting. Without positive guidance, the market sold the yen, but the swaps market shows about 13 bp of tightening has been discounted, up a couple of basis points from a week ago. Leave aside the New Zealand dollar, which is also under pressure ahead of next week's RBNZ meeting that is expected to result in another 50 bp rate cut, the other G10 currencies are mostly +/- 0.15%. Emerging market currencies are also narrowly mixed. The South African rand is on top with a 0.4% gain and the Mexican peso is on the bottom of the leaders' board with a 0.35% loss. 

European benchmark yields are mostly 4-6 bp higher today. The 10-year UK Gilt yield and the 10-year US Treasury yield are up about two basis points. The two-year yield is firm, slightly above 4.30%. It has risen in all but one of the past eight weeks and has risen by around 75 bp. Equities have begun the new week in mixed fashion. Japanese, Chinese, Indian, and Taiwanese shares fell. South Korea's Kospi managed to resist the tug after Samsung announced a ($7 bln) share buyback program. Europe's Stoxx 600 is off about 0.25% and US index futures are trading with a small firmer bias. Gold is trying to end a six-day skid and is up 1.1% today to near $2592. January WTI slipped to a new low for the month today near $66.55 but as recovered to new session highs in Europe near $67.60 before stalling. 

Asia Pacific

The focus in Japan is on the government's efforts to cobble together supplemental budget now that the political logjam has been settled in favor of the country's first minority government. At the same time, the market is probing for official pain threshold in terms of the exchange rate. Key officials recently expressed concern about the speculative nature of the move and used word cues that have warned of intervention in the past. However, intervention now would likely antagonize the incoming US administration. Moreover, Japanese intervention appear to have enjoyed the most success when officials are able to pick a top in US 10-year yield as well. Turning to Australia, the record of the recent central bank meeting will be reported the first thing tomorrow. By the end of 2025, the futures market has about 50 bp of easing discounted. For its part, the PBOC could cut rates this week, but it seems too soon. Still, the volume of lending from the one-year Medium-Term Lending Facility may be raised. Lastly, Beijing appears to have removed a tax rebate program that aided exporters in several sectors including aluminum, refined oil, solar, batteries, and non-metallic mineral products. More details are awaited. 

The dollar posted a key reversal against the yen before the weekend by making a new high for the move and then reversing and settling below the previous session's low. The greenback's 1.4% drop on Friday was the largest decline since last September. Moreover, it came despite the softer US 10-year yield. Yet, follow-through selling was limited to JPY153.85. Nearby resistance is seen near JPY155.30. The Australian dollar recorded an inside day before the weekend, confined to Thursday's range (~$0.6440-$0.6500). It was the first session in six that the Aussie did not fall, and first time in three sessions that it settled within its Bollinger Band. It is consolidating today too, inside the pre-weekend range. A move above $0.6500-15 would help stabilize the technical tone. The recovery of the yen saw a more subdued recovery in the Chinese yuan. The dollar peaked on November 14 near CNH7.2665 and, ahead of the weekend fall to nearly CNH7.23, which is holding today. We see the yuan's five-week slump as reflecting the greenback's broad strength and not an attempt by Beijing to boost exports or offset what is expected to be higher US tariffs. The PBOC continues to temper the yuan's depreciation setting the dollar's reference rate lower than projected. It set the dollar's reference rate at CNY7.1907 (CNY7.1992 on Friday). The average in Bloomberg's survey was CNY7.2298. 

Europe

Of the eurozone's serious challenges, the trade balance is not particularly salient. It has absorbed the Russian shock, and it is weathering the Chinese shock. Ahead of it lies the potential of a Trump 2.0 shock. Through September, the eurozone trade surplus average 15.8 bln euros a month. It posted an average monthly deficit of 31.5 bln euros in the first nine months of 2022 and surplus of 1.8 bln euros in the Jan-Sept 2023. Tomorrow, the ECB publishes its negotiated wage indicators for Q3. Ahead of it the swaps market is confident that when the central bank meets on December 12, it will cut rates by at least another quarter-point. There is slightly less than a 20% chance of a 50 bp cut. Between now and middle of 2025, the swaps market has 125 bp of cuts nearly fully discounted. For the UK, this week's data is back loaded. Wednesday sees October CPI. Government finances are reported Thursday. Retail sales and the flash PMI are out on Friday. The market has all but given up on speculation of a rate cut next month but also is less confidence of a cut at the following meeting (February 6). Over the past week, the odds have been shaved to about 83% from nearly 95% a week ago. Between now and the middle of next year, the swaps market has 47 bp of cuts discounted.

The euro rose for the first time in six sessions before the weekend, and even then, the upticks were minor, and the euro held below $1.06. The 1.65% decline last week was the third largest weekly drop of the year. The euro traded briefly slightly below $1.05 last Thursday but spent the pre-weekend session above $1.0520. It has mostly been confined to a $1.0525-$1.0570 range so far today. The low set October 2023 was near $1.0450 and that is the next obvious technical area. A move above $1.0600-20 would be constructive, but it may take an advance through $1.0650-60 to squeeze the late shorts. Sterling's price action was miserable. It extended its losing streak for the sixth consecutive session ahead of the weekend and posted its lowest close since late June. It lost almost 2.4% last week, its biggest drop since the Truss/Gilt crisis in September 2022. The $1.26 level yielded before the weekend. Upticks today have been limited to about $1.2645. A break of $1.2600 opens could signal a move toward $1.2450-$1.2500.

America

The US reports the Treasury International Capital monthly portfolio flow report today. It is typically not a market mover and comes with a couple month lag. Despite the dollar's strength, foreign demand for US stocks and bonds has waned this year. Consider that in the first eight months of the year net foreign purchases of US financial assets was about $270 bln, which is down by more than 50% from the same period in 2023 (~$606 bln). Stripping out short-term securities, the story is similar. Foreign investors bought a net $303.7 bln of long-term US assets in the Jan-Aug 2024 period. That is down from around $752.5 bln in the first eight months of 2023. The current account deficit, one measure of the US funding needs was about $1.87 trillion roughly the same as H1 23.

The Canadian dollar continued to wilt. It has a six-day losing streak in tow. The greenback's 1.3% rise was the third largest weekly advance this year and took it above CAD1.41 for the first time since the early days of the pandemic. It settled above its Bollinger Band for the second consecutive session ahead of the weekend. It is near CAD1.3770 today. The dollar is consolidating between CAD1.4070 and about CAD1.4105 so far today. A firm CPI report tomorrow and the Canadian dollar's persistent decline may dampen speculation that the Bank of Canada may deliver another 50 bp cut when it meets next month. Still, Rogers, Senior Deputy Governor of the Bank of Canada said earlier this month that Canada was not near the limit of divergence with Fed policy. Yet, the US two-year premium over Canada reached 118 bp last week, the most since 1997. It peaked that in February that year near 205 bp. The exchange rate was CAD1.34-CAD1.137 in February 1997. The US dollar slipped to a four-day low against the Mexican peso ahead of the weekend near MXN20.32. The firmer tone came despite Moody's cutting Mexico's credit outlook to negative and Banxico's rate cut on November 14. The peso initially ticked higher on the government's projection of a 0.6% primary budget surplus in 2025 and an overall deficit of 3.9% GDP (vs. estimated 5.9% this year) but the gains were quickly unwound. The greenback spent most of the waning hours of last week between MXN20.33 and MXN20.40. It is trading firmly today between about MXN20.3270 and MXN20.4465. That leaves the peso down around 0.35% in late European morning turnover, making it among the worst EM performers so far today. All emerging market currencies fell against the dollar last week. The Mexican peso and Brazilian real softened by around 1%.