Quiet End to a Busy Week

by
Marc Chandler
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Overview:  The US dollar is winding down this week on a quiet note. Most of the G10 currencies are trading within yesterday's ranges. On the week, only the Scandis are set to close with gains, though with a little effort, the Australian dollar could too. The Japanese yen and Swiss franc are the laggards off 0.65%-0.75% this week. Most emerging market currencies outside of central Europe are firmer. The South African rand is the strongest this week, followed by four Latam currencies (though not the Brazilian real ~-0.4%, in its Carnival-holiday shortened week).

The Nikkei drew closer to its record high with modest gain that brought this week's advance to 4.4%. Mainland shares that trade in HK rose 2.7% today amid reports of heavy travel during the Lunar New Year holiday, which encouraged speculation of increased consumption. Among the region's largest markets only Taiwan fell today after setting a record yesterday. Europe's Stoxx 600 is trading firmer for the fourth consecutive session. It is up about 1.5% this week, its fourth consecutive weekly advance. Strong earnings are helping lift the NASDAQ futures. The cash index is poised to gap higher. The S&P futures suggest another record high will be seen in the cash market today. Benchmark 10-year yields are higher today. European yields are mostly 1-2 bp firmer, but the strong UK retail sales are weighing more on Gilts, where the yield is up four basis points. It was flat for the week coming into today. The 10-year US Treasury yield is up three basis points to 4.26%, which is about an eight-basis point gain on the week. Gold continues to modest recovery after falling to $1984 after the US CPI report this past Tuesday. It is trading near $2007. April WTI is consolidating after two days of sharp swings that saw a range of roughly $75.50-$78.50. On the week, it is slightly higher after rallying 6.2% last week.

Asia Pacific

With Q4 23 Japanese GDP reported yesterday, the tertiary sector index for December is not so important. Still, it is notable that it snapped a three-month decline (~8.8% annualized), which is the worst H1 20 when Covid was raging. The risk of a recession in Japan this year seems low. Economists look for the world's third largest economy to grow by a little less than 1% this year, which is in line with the latest IMF's forecast. The Bank of Japan seems a bit more optimistic with a 1.2% forecast.

Separately, Japan's MOF reported weekly portfolio flows. Through the first six weeks of the year, here is what the flows look like: Japanese investors are buying more foreign stocks and bonds than they did at the start of last year. One contributing factor is the launch of a new tax-exempt retirement savings plan. The government's balance of payments data showed Japanese investors bought a record amount of foreign equities and investment trusts in January (~JPY1.2 trillion or ~$8.1 bln). The MOF figures are slightly lower. The weekly data show Japanese bought about JPY4.5 trillion of foreign bonds in the first six weeks of the year. They purchased JPY2.6 bln of foreign bonds in the same period last year. Many observers thought the BOJ's raising the cap on 10-year JGBS would spur Japanese investors to repatriate funds, and in this reckoning US Treasuries were particularly vulnerable, and US yields were rising. However, according to Japanese data US government bonds were bought at a record pace in 2023 (~JPY18 trillion). Japanese investors also bought about JPY843 bln of foreign stocks so far this year after purchasing JPY110 bln in the first six weeks of 2023. Meanwhile, foreigners have stepped up their purchases of Japanese stocks. They have bought about JPY3.4 trillion this year so after having bought about JPY365 bln in the first six weeks of last year. Foreign investors have bought about JPY1.3 trillion of Japanese bonds this year through last week after selling around JPY4.1 trillion in the first six weeks of last year. 

The dollar was sold to session lows yesterday near JPY149.55 after the disappointing retail sales report. It frayed the trendline drawn off the low seen before the US jobs data on February 2. As US rates found support, the dollar recovered to about JPY150.25 before consolidating in a little more than a 10-pip range on either side of JPY150. It continues to trade quietly today, in a narrow range of about JPY149.85-JPY150.35. Still, barring a sell-off in North America today, the greenback would extend this year's advance to the seventh consecutive week. The Australian dollar reached almost $0.6530 yesterday in North America, gaining almost 0.5% despite the disappointing Australian employment report. It has held above $0.6505 so far today and is testing yesterday's highs in the European morning. The Aussie must re-establish a foothold above $0.6550 to improve the technical tone. Even then, the high for late January was near $0.6625 and the high before the US jobs report was about $0.6610. The dollar is trading quietly against the offshore yuan. It is in a range of roughly CNH7.2170-CNH7.2230. That is more of less the low since the mainland closed on February 8. The high was set earlier this week near CNH7.2370. It has stayed well within 2% band around the last onshore fix, without any apparent intervention or reports of state-owned bank activity. 

Europe

The data-packed week for the UK ends on a positive note. January retail sales, which are reported in terms of volume rather than price, jumped 3.5%. That is the most since the early days of the recovery from Covid in early 2021. It also follows a dreadful 3.3% decline (revised from -3.3%) in December. All sectors showed an increase except clothing. Still, overall sales volumes slipped by 0.2% in the three months through January from the previous three-month period. This week's data showed a somewhat more resilient labor market and wages pressures that did not ease as much as expected, softer than expected headline inflation, though sticky service prices, which ticked up, and the second consecutive contracting quarter in Q4 23. However, net-net there has been a small decline in rate cut expectations based on the swaps market. The swaps market has slightly less than a 60% chance that the first cut is delivered by the end of H1, down from 67% at the end of last week. It has about 73 bp of cuts priced in this year compared with about 78 bp at the end of last week.

Who will be the first G10 country to cut interest rates? Based on the current set of information, we are inclined to think it will be the Swiss National Bank. Earlier this week, Switzerland reported January harmonized headline CPI of 1.5%, down from 2.1% in December. The median forecast in Bloomberg's survey was for a 2.0% reading. The national core rate slipped fell to 1.2% from 1.5%. The SNB meets on March 21 and a rate cut seems increasingly likely. The Swiss economy contracted by 0.1% in Q2 23 and grew by 0.3% in Q3 23. It will report Q4 GDP at the end of the month and the latest Bloomberg survey found a median forecast for 0.2%. Switzerland last raised it policy rate in June 2023 to 1.75%. The euro fell to a seven-year low against the Swiss franc late last year near CHF0.9255. It poked a little above CHF0.9500 this week, a two-month high. Chart resistance is seen around CHF0.9550. Trendline resistance and the 200-day moving average are near CHF0.9580. That said, the momentum indicators are getting stretched. 

The euro traded to $1.0785 yesterday, stalling in front of the week's high set Monday near $1.0805. A narrow fifth-of-a-cent range is prevailing today (~$1.0755-75). There is a band of resistance from around $1.0810 to $1.0830 that needs to be overcome to lift the tone. And recall that before the US employment data, the euro has approached $1.09. More immediately, if the euro does not settle above $1.0785, it would close lower for the third consecutive week and six of the first seven weeks of the year. Sterling recovered from a low seen near $1.2540 after the poor Q4 GDP. It set the session high a little above $1.26 in North America, on the back of the weaker dollar. It is in slightly more than a quarter-cent range today above $1.2575. Sterling settled slightly below $1.2630 last week. It has risen only one week this year and is off by 1.1%, making it the best performing G10 currency halfway through Q1 24.

America

US January housing starts are expected to have fallen. It would be the second consecutive decline. It would make it the fourth consecutive January that housing starts fell. The data are seasonally adjusted but there might be a residual seasonal factor. Still the Q4 average of 1.45 mln is the highest three-month average since October 2022. January producer prices are also due. They typically do not move the market. Despite talk about pipeline inflation, most seem to recognize the weak relationship with CPI and the PCE deflator.

We suggested a soft CPI report and weak retail sales would cap US rates and the dollar. As it turned out, the CPI was a bit firmer than expected, but the retail sales report was exceptionally poor. The January retail sales drop was four-times larger than the median forecast in Bloomberg's survey and the December series was revised lower. The 0.8% headline decline was largest since last February. Autos and building materials led the decline, but 9 of the 13 categories fell. Poor weather may have contributed to the drop, but the downward revision to December suggests something more. The core measure, which excludes autos, gasoline, food services, and building materials, fell by 0.4%. The median forecast was for a 0.2% gain. On top of that, industrial output defied expectations for a 0.2% gain and fell 0.1% last month, led by 0.5% decline in manufacturing production. Manufacturing output fell in five months in 2023. Mining/drilling output fell by 2.3%, the third decline in the past four months. Utility output, likely aided by the weather, rose by 6%, after declining by a little more than 3% over the previous three months. The two early February Fed surveys, from NY and Philadelphia, ticked up, but do not have much heft in the capital markets. And look at the volatility of the NY survey:  from -14.5 in December to -43.7 in January to -2.4 in February. Still, after yesterday's data, there was practically no change in the odds, reflected in the Fed futures, of a rate cut in May (~45%, down from ~73% at the end of last week. 

The Canadian dollar climbed almost 0.6% yesterday, its biggest gain of the year. This reflected the weaker greenback and the risk-on mood illustrated by the rally in the S&P 500 that closed the gap from Tuesday's sharply lower opening. The US dollar slipped to a marginal new three-day low near CAD1.3460 today before consolidating. It is holding mostly below CAD1.3485. The Loonie is the second best performing G10 currency at the start of 2024, with about a 1.75% loss. Trendline support for the US dollar is seen near CAD1.3450, though the week's low was set on Monday closer to CAD1.3430. Last week, it settled near CAD1.3460. The greenback is trading at a new low for the week against the peso near MXN17.0340 today. The week's high was set after the US CPI near MXN17.2285. Last week's low was slightly below MXN17.01. With only one exception on a closing basis, the dollar has traded between MXN17.00 and MXN17.25 for the past month. Barring a recovery and close above MXN17.0880, the dollar would have fallen for the third consecutive week. This would be the eighth weekly decline in the past 10 weeks.