BOJ Speculation Unwound, Taking the Yen Lower

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Marc Chandler
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Overview: The busy week of central bank meetings is off to a mostly slow start. The dollar is narrowly mixed in quiet turnover, except against the Japanese yen. Many participants seemed to exaggerate the risks of a BOJ move next week and dollar continued its recovery that began ahead of the weekend. Among emerging market currencies, central European currencies appear to be aided by the firmer euro. They are resisting the dollar's advance seen against most other emerging market currencies, including the Chinese yuan, which is near three-week lows. Gold, too, is unwinding last week's gains and near $1992 is near a two-week low. It reached a record high slightly above $2135.50 last week.

Nearly all the large equity markets in the Asia Pacific area advanced earlier today. Hong Kong, and mainland shares that trade there, were the notable exceptions. Europe's Stoxx 600 is, on the other hand, trading slightly lower to start the week. It has a four-week rally in tow. US index futures are also trading a little heavier. The S&P 500 has not posted a weekly decline since the end of October. European benchmark 10-year yields are 1-2 bp lower, though UK Gilts are flat. The 10-year US Treasury yield is three basis points higher to 4.25%. The two-year yield is a couple basis points higher to slightly below 4.75%. Lastly, January WTI was sold after making a three-day high near $71.80.

Asia Pacific

China's November CPI and PPI were reported over the weekend. Deflationary forces intensified. Consumer prices have fell by 0.5% year-over-year as well as month-over-month. It is the largest year-over-year decline in three years, and more than the 0.1%-0.2% decline expected in the newswire polls. China's consumer deflation is driven by the sharp decline in food prices, which are off 4.2% year-over-year. Pork prices are off nearly 50% and egg prices are down by 17%. Excluding food and energy, consumer prices rose 0.6% year-over-year in November the same as in October. It is in the middle of the 0.4%-0.8% range seen since the end of the first quarter. Service prices rose by 1% from a year ago, the least since June. Still, many observers argue that weak CPI is a sign of weak demand. Sometimes it may be the case, but sometimes the situation is more complicated, as we suggest in China's case. The sharp decline in food prices is surely not a sign that Chinese people are eating less. China's per capita consumption has doubled over the past decade. Moreover, despite the drop in the CPI, later this week, China will likely report an acceleration in the year-over-year rate of retail sales. It has already reported that November auto sales rose by more than a quarter year-over-year. Producer prices fell by 0.3% in November for a year-over-year decline of 3% (from -2.8% in October). Some commodity prices, like oil and soy, are lower than a year ago. Copper is little changed, and price of iron ore is up by more than 20% this year. Weak producer prices are not just about deflation but also speaks to producer income and profitability.

Japan reported the preliminary estimate for November machine tool orders. The 3.4% rise was due to the 6.1% month-over-month gain in foreign orders. Domestic orders fell 2.9% after plummeting 25.3% in October. November PPI is due tomorrow, ahead of the Tankan survey on Wednesday. Thursday sees October industrial production ahead of Friday's flash PMI. Generally speaking, after contracting by 2.9% in Q3 (annualized rate), the economy is seen returning to growth this quarter (~0.9%). The focus is on monetary policy, and despite last week's dramatic yen surge, most economists and the swaps market do not anticipate a change in stance next week. Separately, the Kishida government remains unpopular, and the latest Mainichi poll shows support for the cabinet is 21%, the least for a Japanese government in more than a decade. Though it is not often said, Japan's political system is similar to a one-party state, dominated by the LDP, which makes a small concession to have a coalition ally. Except for a brief hiatus, the LDP has been led Japanese governments since 1955. There have been occasional finance scandals within the LDP, and the latest appears likely to take down Cabinet Secretary Matsuno. He is accused of hiding a JPY10 mln (~$69k) of funds for the Abe faction. There are local press reports that suggest several other ministers, also for the Abe faction may be replaced. Since the assassination of Prime Minister Abe, his faction, the largest in the LDP, has been struggling. Unable to agree on a single leader, in August, the Abe faction agreed adopted a group leadership structure, 

Between Friday and today, the dollar has recouped most of what it lows in last Thursday's dramatic drop. In last week's dramatic move, the dollar fell from about JPY147.30 to JPY141.70. That move began being corrected almost immediately, and ahead of the weekend spurred by the rise in US rates following jobs data, it reached JPY145.20 which meets the (50%) retracement objective. Today, it reached almost JPY146.60, overshooting the (61.8%) retracement near JPY146.00. Initial support is now seen in the JPY145.80-JPY146.00 area. The Australian dollar posted an outside up day on December 7, but there was no follow-though buying the following day, ahead of the weekend. It has come back a little heavier but may find support near that December 7 low (~$0.6525). Options for nearly A$900 mln at $0.6550. The greenback rose to a three-week high against the Chinese yuan (~CNY7.1780) and moved above the 20-day moving average for the first time in a little over a month. The PBOC set the dollar's reference rate at CNY7.1163 (vs. CNY7.1123 before the weekend). If the dollar recovers toward JPY150, it could firm toward CNY7.21-CNY7.23.

Europe

The EU reached an agreement about AI regulation but failed to reach an agreement on new fiscal rules. The Stability and Growth Pact was suspended during the pandemic and then Russia's invasion of Ukraine. It is supposed to return next year, but there is a desire to modify it. As is often the case, Germany and France are divided. The press accounts noted that French Finance Minister La Maire said some progress was made--95% of the way there, he said, from 90%. German Finance Minister Linder, who is also dealing with the fallout for the recent court decision that blocked the transfer of off-budget funds for Covid to be used to climate change, claimed the EU was 92% of the way to an agreement. It seems like a distinction without difference. The EU leaders meeting at the end of the week is needed to overcome the remaining obstacles before time runs out. The inability to reach an agreement, though, would seem to be consistent with the German position than the French. 

Four European central banks meet on Thursday: the European Central Bank, the Bank of England, the Swiss National Bank, and the Norges Bank, Norway's central bank. None of the central banks are expected to change policy. The closest call is Norway, where the swaps market sees the risk that the tightening cycle is not over. It last hiked in September to lift the deposit rate to 4.25%. Earlier today, Norway reported a rise in headline November CPI to 4.9% from 4.0%. It is the second consecutive increase in the year-over-year rate. The 0.7% month-over-month increase means that at an annualized rate, headline inflation has risen by 6.4% over the past three months compared with 0.6% over the previous three months. The underlying rate (which excludes energy and adjusts for tax changes) eased to 5.9% from 6.0%. It peaked at 7.0% in June. The swaps market has almost 50 bp of cuts discounted for the ECB in six months and 125 bp over the next 12 months. It has 15 bp of cuts by the BOE in the next six months and nearly 75 bp in the next 12 months. The SNB is seen easing by about 25 bp over the next half year and 65 bp in the next year. 

The euro fell to about $1.0725 after the US jobs data at the end of last week. In the monthly outlook, we warned of a retracement toward there, but it came earlier and differently than imagined. It is confined to less than a third of a cent range today above $1.0750 in quiet, uneventful turnover. There are a little more than 1.5 bln euros in options that expire today at $1.0720-30. A move above $1.0800-25 is needed to lift the technical tone. We saw scope for sterling to pullback toward $1.2450-$1.2500 and the low before the weekend was slightly above $1.2500. The momentum indicators are still falling and a break below the $1.2480 suggests that $1.2450 will be overshot. But today, consolidative forces took hold and sterling has traded between roughly $1.2525 and $1.2575. Regaining the $1.26-handle would improve the near-term outlook. 

America

The November employment report taken in its fullness is consistent with an easing of the labor market but gradually. While recognizing the peculiarities of this business cycle, violating numerous historical regularities, the belief in a soft-landing itself is part of the cycle. The jobs data does challenge the soft-landing narrative. Private sector jobs growth is slowing and the two-month average of 118k (to smooth out the strikers and their return) is the second slowest of the year (116k June/July). The work week ticked up and that also speaks favorably to output. The diffusion index of industries adding headcount improved to 63.4% in November from 52.2% in October. Hourly earnings rose a bit more than expected and the participation rare also edged higher (62.8% matches the post-Covid high).

Over the course of last week, the implied of the December 2024 Fed funds futures contract rose by 20 bp to about 4.30%. The contract settles at the average effective Fed funds rate (not the target rate), and it is stable around 5.33%. That is 100% confidence of that 100 bp of cuts will be delivered next year. It is possible but surely it is not a done deal and how can one be 100% confident? Tomorrow's November CPI report may help illustrate why ahead of the outcome of the FOMC meeting on Wednesday. The median forecast in Bloomberg's survey is for an unchanged headline CPI for the second consecutive month. The headline rate may slip closer to 3.0%. However, the core rate, which is the inflation signal, (headline converges to it rather than the other way around) may rise around 0.3% and the year-over-year rate would remain at twice the Fed's target of the headline rate.

The dollar snapped a four-day rally against the Canadian dollar ahead of the weekend. It held support in the CAD1.3550 area, and with the momentum indicators turning up, the risk is on the upside. Initial resistance is near CAD1.3620, last week's high. Today's high so far is CAD1.3605. The 20-day moving average is closer to CAD1.3640, and the greenback has not closed above it in almost a month. Nearby support is pegged near CAD1.3580 and then CAD1.3550. The swaps market has the first Bank of Canada rate cut fully discounted by the end of next April. The US dollar has been chopping broadly sideways against the Mexican peso, and this may continue over the next few days, ahead of the FOMC (December 13) and the Banxico meeting the following day. The dollar has frayed the MXN17.50 cap but has not settled above it since mid-November. The exchange rate is particularly sensitive to the movement of the long end of the US curve and the general risk environment (S&P 500 is a useful proxy). Initial support is seen in the MXN17.24-MXN17.27 area, while today's low, set in Asia, was around MXN17.34. The move above MXN17.40 in Europe stretched the intraday momentum indicators, suggesting little scope for additional gains in early North American activity.