The Greenback Recovers After the Initial Post-Fed Wobble

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Marc Chandler
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Overview: The US dollar has come back bid after losing ground against most currencies as the markets reacted to the FOMC decision and press conference. The Antipodeans and Scandis have been tagged the hardest, illustrating the risk-off mood, and arguably the weakening growth prospects. Countries that peg their currencies to the dollar have hiked rates, as has the Philippines and Taiwan. The Swiss National Bank and Norway have also lifted policy rates by 50 bp and 25 bp as expected. The ECB and BOE’s decisions are due shortly. Yesterday’s sell-off in US equites and the continued sell-off in electronic trading casts a pall on global markets today. The Hang Seng, Kospi, and Indian markets fell more than 1%. Europe’s Stoxx 600 is off 1.2%, and if sustained, would be the biggest loss since the end of September. European bond markets are mixed with the peripheral premiums widening against the core. UK 10-year Gilt yield is off five basis points ahead of the BOE meeting. The 10-eyar US Treasury yield is firm, slightly above 3.48%. The stronger dollar has seen gold tumbled nearly $30 to a six-day low near $1774. It had reached six-month high near $1824.50 on Tuesday. January WTI, which tested $70 a barrel at the start of the week reached $77.75 yesterday and is consolidating at the upper end of yesterday’s range today. US natgas is rebounding 1% today after falling a7.3% yesterday. Europe’s natgas benchmark is 2.1% higher today. It fell 3.8% yesterday. Iron ore snapped a three-day drop and recouped most of those losses with a nearly 2.5% gain today. March copper is off 1.5%. It had rallied nearly 2% over the past two sessions. March wheat is about 0.5% firmer after falling about 0.75% in the past two days. 

Asia Pacific

Japan's trade balance is notoriously seasonal, and for the past 15 years, it has deteriorating in November from October. In a year that has seen a dramatic worsening of its trade balance amid the jump in energy and food prices, November shortfall narrowed slightly from JPY2.17 trillion (~$16.1 bln) to JPY2.03 trillion. Economists had projected a smaller shortfall, but imports slowed less than expected (30.3% year-over-year from 53.5% in October rather than to about 27%). The slowing of exports (to 20% from 25.3%) were in line with expectations. Oil and coal led imports. It is the 16th consecutive months of trade deficits, and Japan is on track for record annual shortfall this year.

Australia's created 34.2k new full-time jobs in November. That compares was a revised 55k new full-time positions in October (revised from 47k) a less than the 44.5k average in in the first ten months of the year. Impressively, the participation rate rose to 66.8% from 66.6%, a new record high, which compares to 65.9% at the end of 2019. The unemployment rate was unchanged at 3.4%. Separately, consumer inflation expectations fell to 5.2% this month from 6.0% last month. The peak was in June at 6.7%.

The PBOC kept the one-year medium term lending facility rate at 2.75%, as expected but slowed lending less than expected (CNY650 bln from CNY850 bln), but more than the CNY500 bln due this month. However, the focus was on the disappointing economic data for last month, before the surge in Covid cases associated with the policy reversal and press reports about how companies are preparing to minimize the disruption. Surveyed joblessness rose to 5.7% from 5.5%, the highest since May. Retail sales fell 5.9% from a year ago after a 0.5% decline in October. Industrial output slowed to 2.2% year-over-year from 5.0%. Economists expected a 3.5% increase. Investment slowed to 5.3% from 5.8%. Meanwhile, despite new initiatives to prop up the property market, the sector is going from bad to worse. New house prices continued to decline as they have uninterrupted beginning in September 2021. Property investment is off 9.8% through November from a year ago (-8.8% in October), and, in the same period, residential property sales have plummeted by 28.4%.

The dollar wobbled against the yen in the immediate reaction to yesterday's FOMC meeting to settle around JPY135.50. It is trading a little more than a yen higher in the European morning, even though the US 10-year yield is only slightly firmer. Recall that the greenback peaked around JPY138 before the softer than expected US CPI on Tuesday. Today's meets the (61.8%) retracement objective of those losses. Note that tomorrow there are options for $1.5 bln at JPY137.00. The intraday momentum indicators are stretched with the push up in Europe, but the market does not appear done. The Australian dollar has also been hobbled by profit-taking pressures. It briefly poked above $0.6880 yesterday, stopping shy of Tuesday's three-month high (~$0.6895) and has fallen to about $0.6765 today. Support is seen in the $0.6740-50 area. There are options for nearly A$1.8 bln at $0.6700 that expire tomorrow. The sell-off that accelerated in the European morning has also left the intraday momentum indicators oversold. The Chinese yuan is softer but within the range seen Tuesday (~CNY6.9370-CNY6.9890). In fact, the greenback has not traded above CNY6.98 today. The PBOC set the dollar's reference rate at CNY6.9343 (yesterday's fix was CNY6.9535) compared with the median projection in Bloomberg's survey of CNY6.9358. Separately, note the Philippines central bank delivered the 50 bp hike as expected (to 5.5%). Hong Kong Monetary Authority also hiked by 50 bp. Taiwan raises its benchmark rate by 12.5 bp, which was also as expected. 

Europe

It is a busy day for European central banks. The Swiss National Bank delivered the anticipated 50 bp hike in its policy rate so it stands at 1.0% now. The swaps market sees it on hold for until possibly the H2 23. The SNB sees inflation falling from almost 3% now to 2.4% by the end of next year and 1.8 in 2024. The market (median forecast in Bloomberg's survey) sees CPI falling to 2.1% next year and 1.2% in 2024. Norway's central bank hiked the deposit rate 25 bp to 2.75%. Headline inflation stood at 6.5% last month, after peaking at 7.5% in October. The underlying rate, which adjusts for tax changes and excludes energy, also eased last month. It stands at 5.7% after peaking in October at 5.9%. The central bank see inflation falling to 4.5% next year and 3.1% in 2024. The market (median forecast in Bloomberg's survey) is more aggressive, seeing inflation falling to 4.0% next year and 2.3% in 2024. Economists see the risk of another 25 bp hike next year, and the central bank seemed to validate the expectation. The changes in the krone's exchange rate are correlated with changes in the price of Brent, though the rolling 60-day correlation is not particularly stable. Arguably, it acts more like a risk currency than a petrocurrency. Its correlation with the S&P 500 (proxy for risk) is greater and somewhat more stable than the correlation with oil.

ECB and BOE on tap. Both are expected to lift their key rates by 50 bp. It would take the ECB's deposit rate to 2.0%. The swaps market anticipates a terminal rate around 2.75%. Since peaking in April, as of last week, the Fed's balance sheet has fallen by about $356 bln or about 4%. Including the early prepayment of the TLTROs and maturing loans, this month, the ECB's balance sheet will have fallen by about 865 bln euros or almost 10%. There does not appear to be compelling reasons to provide much detail about a formal QT program at today's meeting. The updated staff forecasts and the forward guidance from President Lagarde, besides that the rate outlook will be decided on a meeting-to-meeting basis will likely be the focus. Since the ECB met last end the end of October, the price of the front month Brent futures contract has fallen by around 14% and the euro has appreciated by around 7% against the dollar and a more modest 2% on a trade-weighted basis.

A half-point move by the BOE will bring the base rate to 3.50%. The swaps market anticipates another 100 bp next year. By the BOE's reckoning its balance sheet has fallen from a peak of 42.8% of GDP in November 2021 to 38.4% of GDP at the end of last month. Since bottoming on September 26 at an historic low of around $1.0350, sterling has led the major currencies by appreciating 16.3%. It has retraced more than half its losses from the June 1, 2021, peak near $1.4250. The Bank of England expects the UK economy to contract by 1.5% next year and 1.0% in 2024. The Office for Budget Responsibility is not as dour. It sees a 1.4% contraction next year followed by a 1.3% expansion in 2024. The median forecast in Bloomberg's survey has a 1% fall in GDP next year followed by 0.9% growth in 2024.

The euro reached a new six-month high yesterday ($1.0695) but is also succumbing to profit-taking today. It approached $1.06 in the European morning before finding bids. That is about the middle of this week's range. The next area of chart support seen in the $1.0560-80 range, while intraday resistance may be seen around $1.0640-60. Sterling met the (61.8%) retracement of this week's gains with losses that took its briefly below $1.2300 in early European trading. It has rebounded a little through $1.2350, where there are options for GBP1.55 bln that expire today. Sterling stalled yesterday (and Tuesday) in front of $1.2450, where another roughly GBP900 mln of options are struck that roll off today.

America 

We asked yesterday if the Fed could tell the market anything it did not already know. When the dust settled on a volatile session, the US two-year yield finished the session practically unchanged while the yield on the 10-year note was off by about 2.5 basis points. The market shifted marginally to a peak in Q2 23. The implied yield of the June Fed funds futures settled 16 bp below the March contract from 13 bp on Tuesday and 18 bp at the end of last week. Despite the Chair Powell's insistence that no cut will be contemplated until the Fed is convinced that the inflation is on its way back to its target, the implied yield of the December 23 Fed funds futures was 31.5 bp below the September 23 contract, which was half of a basis point lower on the day and 1.5 bp basis points wider than at the end of last week.  

Despite efforts in the media and some analysts to play up a divergence between hawks and doves, there were no dissents at yesterday's meeting. And of the 19 dots, only two were below 5% at the end of next year. The median dot sees the Fed funds terminal rate peaking at 5.1%, up from 4.6% in September. The rate is seen at 4.1% at the end of 2024 (3.9% previously), and 3.1% in 2025 (from 2.9%). The median projection  (Summary of Economic Projections) made a few material changes. First, the median forecast for growth next year was cut to 0.5% from 1.2% in September. Second, the median projection boosted the unemployment rate by 0.2% for the next three years to 4.6% in 2023 and 2024 before easing to 4.5% in 2005. Third, the PCE deflator projections were raised to 3.1% next year (from 2.8%) and 2.5% in 2024 (from 2.3%), and 2.1% in 2025 (from 2.0%).

American households have gone into their savings, taken cash out when refinancing houses, and took on debt. Through September, when adjusted for prices, retail sales rose about 1% in the US. Retail sales capture less than half of consumption. The US reports nominal retail sales for November today. The combination of slowing inflation and weaker demand is expected to result in the first negative reading since July. Black Friday is expected to have helped blunt the drag. Lower gasoline prices (-3.4% at the pump) may have freed up some funds for other spending. The median forecast in Bloomberg's survey looks for the core rate (excludes autos, gasoline, building materials, and food services) may have eked out a 0.1% gain. It would match the smallest increase of the year and bring three-month average to 0.4%, the lowest since April.

Canada reports November housing starts, which are holding are better than one might expect given the aggressive rate hikes this year. Though October, housing starts averaged almost 266k (SAAR), off about 4.3% from the pace seen in the first ten months of 2021 and more than 26% higher than the average in the same period in 2019. Existing homes sales are a different story. They have fallen by an average of 3.6% a month this year through October. In the first ten months of 2021l they fell by slightly less than 1% a month. The Canadian dollar and rates do not seem particularly sensitive to these time series.

Mexico's central bank is widely expected to match the Fed's 50 bp hike today and lift its overnight rate to 10.5%. Year-over-year CPI slowed for the second consecutive month in November to stand at 7.80%, after peaking in August and September at 8.70%. The core rate edged to a new cyclical high of 8.51% in November, the 24th consecutive month of increases. Mexico's economy is slowing. It grew by a little more than 1% quarter-over-quarter in the first two quarters of the year and slowed to a slightly less than 1% in Q3. It is expectation to grow by around 0.5% here in Q4 gradually slowing further next year. The IMF estimates that the Mexican economy will expand by 2.1% this year and 1.2% next year before rebounding in 2024. The swaps market sees Banxico's tightening cycle nearly complete and sees a terminal rate near 10.75%.

The US dollar fell to a marginally new seven-day low against the Canadian dollar yesterday near CAD1.3520. Important technical support is seen near CAD1.35, where there are around $710 mln of options set to expire today. The greenback has recovered to around CAD1.3590. Yesterday's high was about CAD1.3610. There is another set of options at CAD1.37 for around $835 mln that expire tomorrow. As we have noted, in weak US dollar environment, the Canadian dollar typically is a laggard. Today, the greenback is bid, and the Canadian dollar is the best performing G10 currency, down about half as much as the Swiss franc, the number two performer. The Mexican peso rallied after the Fed's decision yesterday but has offered today. The US dollar made marginal new seven-day low (~MXN19.5160) before settling near MXN19.6365. It has returned to MXN19.7725 today and looks points to test the MXN19.80-85 area, ahead of the central bank meeting.