Don’t be Burned in the Churn

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Marc Chandler
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Overview: The broad consolidation in the dollar after the gyrations at the end of last week continues, and within it the greenback is a bit softer today. Among the G10 currencies, only the yen is failing to post gains. Most emerging market currencies, led by central Europe, are also firmer today. A notable exception is a handful of Asian currencies, include the South Korean won, Taiwanese dollar, and the Philippine peso. The market's focus is on tomorrow's US CPI. Meanwhile, the US 10-year yield is lower for the third consecutive session and is below the 4% threshold ahead of today's Treasury auction. European benchmark 10-year yields are also 2-4 bp lower. Despite a weak reception to its 10-year bond sales, the disappointing wage growth in Japan helped restrain yields and the 10-year JGB yield slipped slightly to almost 0.57%.

Japanese stocks, on the other hand, extended their rally. The 2% advance lifted the Nikkei to new highs since the early 1990s. Most of the other large bourses in the region fell. Europe's Stoxx 600 is steady after slipping by 0.2% yesterday. US index futures are trading with a slightly firmer bias. Several large banks kick off the earnings season at the end of the week. Gold is trading quietly mostly between $2025 and $2040 today, well within the recent range. February WTI is in a narrow range of a little more than a dollar below $72.75. API estimated that private crude inventories fell by about 5.2 mln barrels, which is a much larger drop that expected from the government's calculation due later today.

Asia Pacific

Japan reported a smaller-than-expected rise in Tokyo's December CPI (2.4%) and weaker-than-expected household spending (-2.9%) in November yesterday. Today, it is has followed up with a miserly 0.2% year-over-year increase in labor's cash earnings, down from 1.5% in October, which had been flattered by bonus payouts. The median forecast in Bloomberg's survey for steady report. In the year through November 2022 earnings rose 1.9%. Wages have lagged inflation. Real cash earnings have fallen on a year-over-year basis without exception since April 2022. This is not a post-Covid developments. Real cash earnings were negative in 2019 (except in September) and in six months in 2018.

Australia's monthly CPI report showed CPI falling to 4.3% year-over-year in November from 4.9% in October, a slightly larger-than-expected decline. Traditionally, Australia reports inflation quarterly but introduced a monthly measure in October 2022. It peaked at 8.4% in December 2022. The November 2023 print was the lowest since January 2022. The Reserve Bank of Australia forecasts CPI to fall to 3.3% this year. The IMF is less sanguine and forecasts a 4% increase. Australia's overnight target rate is 4.35%. Three G10 countries are lower:  Sweden (4.0%), Denmark (3.6%), and Japan (-0.1%). The futures market is discounting about an 60% chance of a cut near the end of H1 24. A cut had been fully discounted in the second half of December. Two cuts this year are almost completely discounted. Before the central bank meets on February 6, it will have the quarterly CPI in hand and another jobs report. 

The dollar tested the 200-day moving average against the Japanese yen yesterday near JPY143.40, a three-day low. It recovered to new session highs to slightly above JPY144.60. The gains were extended to JPY145.15 in the Asia Pacific session today before retreating to around JPY144.80 in the European morning. There are some chunky options struck at JPY145: $1.9 bln in options expiring there today and another batch for $1.6 bln expiring on Friday. The dollar's recovery materialized without much help from US rates, which were practically unchanged yesterday and the $52 bln sale of three-year notes was well received. Despite a sharply low yield (4.10% vs. 4.49% at the last auction), the bid-cover rose to 2.67 (from 2.42). Today's 10-year and tomorrow's 30-year sale (another $58 bln combined) may be more challenging. The Australian dollar was turned from $0.6735 on Monday and again yesterday. Still, it is finding support in the $0.6675-80 area. The next immediate target is the low from last Friday near $0.6640. The daily momentum indicators are trending lower and are not yet stretched. Against the Chinese yuan, the dollar settled at its best level since December 13 around CNY7.1685. It reached slightly above CNY7.1765 today before steadying. There is much speculation in the market about a cut in in the benchmark one-year Medium Term Lending Facility (now 2.50%) at the start of next week. There is also speculation that a required reserves can be reduced again shortly. Last month's high was near CNY7.1785. The dollar peaked against the offshore yuan in December near CNH7.20 but stalled yesterday and today near CNH7.1880. The PBOC set the dollar's reference rate at CNY7.1055 compared with the average in Bloomberg's survey of CNY7.1625.

Europe

Germany reported a dismal 0.7% drop in November industrial output yesterday. Today, France reported that the three-month drop in industrial production (-4% at an annualized rate) ended in November with a 0.5% gain, well above the flat report expected. While industrial output may be stabilizing, goods consumption is more precarious. The November figures are due tomorrow and household consumption is expected to have fallen by 0.2%, after a 0.9% fall in October. Through October, monthly consumption was unchanged on average, and this is after adjustment for inflation. However, in the three months through October, an average of a 0.5% decline was recorded. In GDP terms, French consumption rose by 0.2% in Q2 23 and 0.3% in Q3 23. The French economy contracted by 0.1% in Q3 23 and may have expanded by 0.1% in Q4. The central bank forecast 0.9% growth this year. The EC is more optimistic and forecasts 1.2% expansion this year and the IMF is at 1.3%.

French President Macron has begun the new year with a government shakeup that has seen Prime Minister sacked (technically she resigned apparently at his request). She shepherded Macron's controversial legislation (retirement reform in 2022 and last month, a contentious immigration bill. Borne has led a minority government since 2022 and relied on conservative votes to pass the immigration legislation. Attal, the education minister, replaces Borne. Macron, who cannot run again when his second term ends in 2027, has seen his approval rating fall to around 27%, according to the latest Elabe survey (Borne's at 23%, trailed Macron). Attlal is the second-most French politician now with 39% support. Former PM Philippe is slightly ahead. Macron's new government appears aimed at positioning ahead of the June EU Parliament elections and trying to influence the competition for his successor. The market (bonds and equities) seemed to barely react to France's political developments. 

The euro continues to chop inside the range set after the US employment data at the end of last week: ~$1.0875-$1.10. On Monday and Tuesday, the day's range was limited to about a half-of-a-cent. It is in slightly more than a quarter-cent range above $1.0920 today. It has held below $1.0985, where options for 2.2 bln euros expire today. Although the euro reached approached the initial retracement target ($1.0875-85), the price action does not suggest a low is in place and the momentum indicators are still falling. We can envision another leg lower toward $1.08 or so. It is difficult to get excited about sterling, which continues to be mired in a two-cent range (~$1.26-$1.28). It is straddling the middle of the range (~$1.2685-$1.2735) There are options expiring at both ends of the range on Thursday (GBP400 mln at $1.2790) and Friday (GBP655 mln at $1.2600). We are more inclined to see a downside break and the first test may be on the $1.2500-40 area, which houses the 200-day moving average and last month's lows.

America

The focus is really on tomorrow's US December CPI report. Today's final November wholesale inventory report is more for economists than market participants. The supply chain disruptions led to an accumulation of inventories (2021 and into 2022) and spent most of 2023 in a liquidation phase. Through November, wholesale inventories fell by an average of 0.3% a month in 2023, after growing by an average of 1.5% a month in the Jan-Nov 2022 period. Following the inventory report, the Atlanta Fed will update is GDP tracker. After the recent batch of data, including the PMI, ISM, and trade reports, the tracker slipped to 2.2% from 2.5% on January 3. Late in the session, NY Fed President Williams gives a speech on the 2024 economic outlook. As the vice-chair of the FOMC, the NY Fed is the only Fed president that has a permanent vote. He is part of the central bank's leadership and is typically on message.

Canada reported a smaller-than-expected goods surplus for November, but the October surplus was revised slightly higher. However, the figures were sufficient to turn what had been a trade deficit though October into a small surplus in the first 11 months of 2023. However, neither that nor the 2.4% jump in WTI were about to offset the risk-off mood on the Canadian dollar. The greenback posted a higher high for the third consecutive session, rising to CAD1.3415, which it had not seen since December 15. It has come back softer today. We suspect the CAD1.3350-60 area will hold. The Mexican peso's four-day rally was snapped yesterday after the December CPI figures. The roughly 0.85% pullback in the peso was the largest decline in about a month. Headline inflation at 4.66% was a little firmer than expected while the core rate at 5.09% was slightly softer than expected. The bi-weekly reading saw the core rate fall below 5% for the first time since second half of September 2021. The swaps market has the first cut discounted for later this quarter. The dollar recorded a four-month low on Monday near MXN16.7850 and reached almost MXN16.99 yesterday. It poked briefly above MXN17.0 today. All the Latam currencies fell yesterday, and the Chilean and Colombian pesos fell more than the Mexican peso. Nearby resistance is seen in the MXN17.05-MXN17.10 area.