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Apple, China, Yen, and US Jobs: Welcome to 2019

Summary:
The New Year is off to an auspicious start. The Japanese yen, the third most actively traded currency behind the dollar and euro, got caught in a vortex of a retail short squeeze, algos, and who knows what else. The US dollar plunged from around JPY109 to a slightly below JPY105 in a few minutes a little more than an hour after US markets closed yesterday.   Japanese markets were still closed for the holiday, which may have contributed to the light liquidity.  Market talk suggests the move may have begun as Japanese retail investors began unwinding short yen/long Australian dollar and short yen/long Turkish lira positions, both which have been favorite speculative retail plays in the first half of December. There was

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Apple, China, Yen, and US Jobs: Welcome to 2019The New Year is off to an auspicious start. The Japanese yen, the third most actively traded currency behind the dollar and euro, got caught in a vortex of a retail short squeeze, algos, and who knows what else. The US dollar plunged from around JPY109 to a slightly below JPY105 in a few minutes a little more than an hour after US markets closed yesterday.  

Japanese markets were still closed for the holiday, which may have contributed to the light liquidity.  Market talk suggests the move may have begun as Japanese retail investors began unwinding short yen/long Australian dollar and short yen/long Turkish lira positions, both which have been favorite speculative retail plays in the first half of December. There was a moment there that the yen had appreciated 10% against the lira and 8% against the Aussie.

Recall, the Australian dollar gapped higher against the yen on December 3, the first trading day of December. That proved to be an exhaustion gap, and through the end of the year, the Aussie lost a little more than 8% against the yen. It was flirting with JPY76.00 late yesterday before plunging to about JPY70.65, according to Bloomberg. That said, there is still no agreement on the extent of sterling’s flash crash in October 2016, which so far, remains the recent low for sterling.

Some link the pressure on the Aussie to its link as a proxy for China. Shortly after the US markets closed yesterday, Apple reduced its sales outlook due to “unforeseen” slowdown in China. It is the first cut in its sales outlook in a decade, but many observers wonder how “unforeseen” it really was given the slowdown that is evident in the macro data. The official and Caixin manufacturing PMI fell below 50 in December.

Just as one can be known by one’s enemies, so to can real economic assessment be known by the policy response. Chinese policy is set to ease on several channels: monetary, fiscal, taxes, and tariffs. Earlier today, for example, the PBOC changed the definition of small businesses for bank reserve purposes from a credit line of CNY5 mln to CNY10 mln (~$1.5 mln). This allows more companies to fall under the targeted reserve requirement ratio. It is not immediately clear how much cash will be freed up by the PBOC’s new definition, but estimates run from almost $60 bln to a little more than $100 bln.

The yen’s surge took the US dollar below a two-and-a-half-year trend line that came in near JPY106.50. The trendline is found by connecting the June, August, September 2016 lows and the low from March 2018. Although the dollar has resurfaced above the trend line and most long positions (with stops) would likely have been cleared out, but confidence has been shaken, to put it mildly. The dollar has been unable to re-enter the Bollinger Band, where the lower-end is found near JPY108.10.

The yen’s story has eclipsed yesterday’s dismal news from the EMU, which confirmed the flash manufacturing PMI of 51.4, the lowest since February 2016. Germany’s manufacturing PMI is at a 33-month low, France, a 27-month low, Spain, a 28-month low. Tragically, Italy’s manufacturing PMI was below the 50 boom/bust level for the second month, but the small gain to 49.2, represents a two-month high.

The euro has not been above $1.15 since October 22. It stopped just shy of that yesterday and was beaten back to $1.1325 yesterday, in what may not only mark an outside down day but also an outside down week (requires a close below ~$1.1345). It found support in Asia a little above $1.13. Although the euro has recouped half of yesterday’s loss, it may run out of steam as the European session winds down. Look for the $1.1425 area to offer an initial cap. 

Meanwhile, weekly initial jobless claims in the US surprised on the upside, but there may be distortions over the holiday period. The ADP private sector jobs estimate rose to 271k, the largest increase since February 2017. The report was marginally tainted by the November revision to 157k from 179k. On the other hand, the employment sub-index of the ISM show manufacturing employment slowed. The government closure continues, but many expect the Bureau of Labor Statistics to still issue is monthly non-farm payroll report on January 4.

The market expects improvement from the soft 155k increase in November. The Bloomberg median forecast is for 180k. This would be in line with the three-month average (170k) though off from the 2018 average of 206k and the average of 221k in 2017. Hourly earnings will be closely monitored. The base effect means that even a 0.3% increase in December will mean a slower year-over-year pace (3.0% vs. 3.1% in November). Still, it would be the fourth month in the past five that the year-over-year pace was 3% or higher.

Canada also reports December jobs data tomorrow. A milder report after the heady 94k jobs gain reported in November. However, even a strong report would do little to offset concerns emanating from the housing sector, consumer indebtedness, and weak oil prices. Unable to get above CAD1.3660 in several attempts, the US dollar has been set back to CAD1.3500, where the 20-day moving average can be found. The greenback has not closed below this moving average since October 16. The intraday technicals suggest the low is in place.


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Marc Chandler
Marc Chandler is Global Head of Currency Strategy of Brown Brothers Harriman (BBH). Previously he was the Chief Currency Strategist for HSBC Bank USA and Mellon Bank. He has been covering the global capital markets in one fashion or another for 25 years, working at economic consulting firms and global investment banks. A prolific writer and speaker he appears regularly on CNBC and has spoken for the Foreign Policy Association. In addition to being quoted in the financial press daily, Chandler has been published in the Financial Times, Foreign Affairs, and the Washington Post. BBH provides specialist services and innovative solutions to many Swiss asset managers that include a global custody network of close to 100 markets, accounting, administration, securities lending, foreign exchange, cash management and brokerage services. Feel free to contact the Zurich office of BBH

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