Greenback Surges as Rates Back Up

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Marc Chandler
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Overview: The US dollar is bid across the board and posting its best session of the month. It is up between about 0.5% (Canadian dollar) to almost 1.0% (Australian dollar) among the G10 currencies. Among the emerging market currencies, only the Russian ruble is holding its own. Approaching CNY7.20, the greenback is near two-month highs against the yuan. The dollar has been bolstered by rising US rates. The US two-year yield is up six basis points to near 4.20%, having bottomed at the end of last week around 4.11%. The US 10-year yield is up about the same amount to poke above 4.0%. European yields are as much as two basis points lower.

Equities are broadly lower. Only China’s CSI managed to rise today (~0.6%) in Asia Pacific among the large bourses. Europe’s Stoxx 600 is off for the second consecutive session and for the fifth time in the past six sessions. It is making new lows for the month. US index futures are 0.5%-0.75% lower. A rising dollar and firmer rates are pushing gold lower. It is near $2040 after trading above $2060 at the end of last week. February WTI is rising for the third consecutive session. It is up about 0.5% today and pushing above $73 a barrel.

Asia Pacific

Defying expectations, the PBOC did not cut the one -year Medium-Term Funding facility yesterday but did provide a net injection of funds (CNY216 bln or ~$30 bln). Last month, the PBOC had provided policy banks with CNY350 bln of loans at a rate 10 bp below that MLF, which is understood as the floor. The lack of a cut yesterday is confusing, though it keeps the focus on quantities rather than prices. A cut in required reserves may still be on the table, but without a cut in the MLF, banks will have little incentive to cut the loan prime rates next week even though they had not fully transmitted the last cut from August 2023.

Beijing’s immediate response to the Taiwanese election has been subdued. On one hand, the DPP’s candidate and current vice president Lai Ching-te won a plurality of votes and will become president in late May. A majority of the vote was split between the two opposition candidates, who failed to combine forces. Also, the DPP lost 10 parliamentary seat and its majority. The KMT picked up 14 seats, with 52, it has one seat more than the DPP. Yet, it, too, did not capture a majority. This boosts the power of TPP, it picked up five seats and now has eight. As it has done previously, the US sent a bipartisan delegation to Taiwan, though before they arrived, US President Biden said unequivocally that the US does not support Taiwan’s independence. As we have argued before, the US strategic ambiguity is meant to prevent a unilateral declaration of independence by Taipei. After all, China’s war plans must assume that the US would defend Taiwan, regardless of its declaratory policy.

Japan’s on-the-run two-year note yield slipped below zero yesterday for the first time in nearly four months and returned to zero today. The dollar recovered from the pre-weekend low around JPY144.35 to nearly JPY146 yesterday. Follow-through buying has lifted the dollar to about JPY146.75 in the European morning. It is the best level since December 7, and our next target is the JPY147.50 area. The Australian dollar was sold back to the $0.6650 yesterday after being turned back from the $0.6725-30 area at the end of last week. The Aussie has lurched lower and is fraying support near $0.6600. There is scope to the 200-moving average (~$0.6585) and a break of its leaves little chart support ahead of last month’s lows (~$0.6525).

The dollar’s broad-based strength has seen it push above the December high (~CNY7.1880) to CNY7.1940. Above here, the looks to be potential toward CNY7.2180. The PBOC set the dollar’s reference rate at CNY7.1134, the highest since December 12 (CN7.1084 yesterday). The average in Bloomberg’s survey was CNY7.1769. News that foreign investors bought Chinese bonds for the fourth consecutive month in December seemed to have little impact. 

Europe

Germany’s preliminary estimate is that Europe’s largest economy contracted by 0.3% last year, which is slightly more than expected. The details are not reported with this initial estimate, but it appears that Q3 GDP was revised to flat from -0.1%, while in Q4, the economy shrank by 0.3%. The Bundesbank forecasts 0.4% growth this year, but, ironically, the IMF and EC are more optimistic and have projected 0.9% and 0.8% GDP, respectively. The latest monthly Bloomberg survey found a median forecast of 0.3%. Conventional wisdom says Germany is de-industrializing, but that seems like an overstatement and simplification. Energy costs are substantially higher in Germany than say the US. One estimate puts household energy costs around 45% higher than America. However, in 2019, the service sector in German account for around 70% of GDP and about the same percentage of employment. The industrial sector accounted for around 29% of GDP. Last year, it appeared that the service sector accounted for a slightly more than 69% of German GDP while the industrial sector was about 23.5% of GDP.

The number of people employed in the UK fell by 24k in December but the November loss of 13k was revised to a gain of nearly 9k. Wage slowed in the three-months through November. The UK created about 255k jobs in the first half of 2023. This slowed to about 50k in H2 23. Average weekly earnings peaked last July at 8.5% (three-months, year-over-year) and stood at 6.5% in November, the lowest since last March. Tomorrow, the UK reports December CPI. After falling by 0.2% in November, it is expected to have risen by 0.2% last month. If so, that would translate into a flat annualized pace in Q4 23 after less than a 0.5% annualized pace in Q3 23. Still, the year-over-year pace is seen at 3.8%, down from 3.9% in November. The core rate is seen slipping to 4.9% from 5.1%. Still, the Bank of England, which meets on February 1 seems to be in no hurry to ease policy (5.25%). At the last meeting, there were still a few dissents that favored another hike. The swaps market has the first cut nearly fully discounted for May.

The euro traced out a broad range between roughly $1.0875 and $1.10 on January 5, the day the US reported December employment figures. It has been in that range since then. It has approached the lower end of the range in Europe today. Below there, the 200-day moving average, slightly below $1.0850 may draw the single currency.

Sterling remains confined to a two-cent range ($1.26-$1.28) that was first established in mid-December. There were two minor exceptions late last year on the upside, but sterling has not settled above $1.28 since the end of last July. Like the euro, it is approaching the lower end of its range. The session low, so far, is near $1.2625. A break of $1.2600 could see another half-cent loss to the 200-day moving average and then the December low (~$1.25).

America

The US Congress is still working to avert a partial federal government shutdown at the end of this week. A temporary spending bill, which the new House Speaker eschewed to secure his post, is now being considered. It kicks the proverbial can slightly down the road–to March 1. The other spending authorization that ends on February 2 would be extended to March 8. The Senate could hold some procedural votes on the continuing resolution starting today. It requires unanimity in the Senate to pass the bill. Separately, there is another bipartisan bill in the works that would expand the child tax credit and business tax breaks that could be approved by the end of the month. The $70 bln bill would reinstate fully expensing R&D expenditure, restoration of the pre-2017 interest deduction, and allowing more rapid depreciation of capex. 

This week’s US economic data is concentrated on Wednesday. Today’s Empire State survey for January will be overshadowed by tomorrow’s retail sales and industrial production reports and the Fed’s Beige Book. Retail sales are expected to have risen by 0.4%, helped by stronger auto sales. The core measure that excludes autos, gasoline, building materials and food services, are expected to have risen by 0.2% after a 0.4% gain in November. That would be core retail sales rose at an annualized rate of about 2.4% in Q4 after a 6% annualized pace in Q3. Industrial production and manufacturing output are expected to be flat in December after rising by 0.2% and 0.3%, respectively, in November. Business inventories are seen slipping by 0.1% November. It would be the first back-to-back decline since mid-2022. The Atlanta Fed’s GDP tracker will be updated after the data. It stood at 2.2% as of last week. Bloomberg’s monthly survey found a median forecast of 1.2%, while the high-frequency survey median was 1.5%.

The US dollar made a marginal new high for the year against the Canadian dollar yesterday, approaching CAD1.3450. It has been driven higher, through the 200-day moving average (~CAD1.3480) to CAD1.3500. The next target maybe CAD1.3540, which about the halfway point of the greenback’s slide since last the 2023 high was set near CAD1.3900 on November 1. It is fraying the upper Bollinger Band (~CAD1.3480) for the first time since last October. 

The US dollar reversed lower from about MXN17.0680 last Thursday and posted a bearish outside down day. Follow-through selling before the weekend took the greenback to around MXN16.8330. It traded quietly yesterday, inside the pre-weekend range. It is succumbing to the broadly stronger greenback and reached MXN17.0465. A push above last week high could see the dollar return to this month’s high near MXN17.1035. In the last couple of months of 2023 of 2023, speculators in the futures amassed a net long peso position of around 90k contracts. Rarely over the past decade have they had a larger net long position. We suspect many will look to take profits before the first rate cut (later here in Q1) and before the election at the start of June.