Ueda Lifts Yen, Leaving Euro and Sterling Pinned Near Lows

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Marc Chandler
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Overview:  Escalating tensions in Europe and comments from Bank of Japan Ueda that spurred speculation of a December hike are the main drivers of the foreign exchange market today. The yen is the strongest of the G10 currencies, up about 0.65%, while the euro is the weakest, off a little more than 0.25%, and sterling is down almost as much. Most of the other G10 currencies are little changed. Led by central European currencies, most emerging market currencies are weaker today, including the Mexican peso. It was the weakest of the emerging market currencies yesterday and is off another 0.4% today. 

Equities are weaker and bonds firmer. All the large bourses in Asia Pacific were lower but China, where a small gain was recorded. Europe's Stoxx 600 is off for the fifth consecutive session, the longest in two months. US index futures are lower, with the Nvidia's disappointment weighing on the NASDAQ futures, which about 0.50% lower. The S&P 500 has not fallen this week, but is down around 0.35%. Benchmark 10-year yields are a little lower, with German Bunds and UK Gilts setting the pace with around a three-basis point decline. The 10-year US Treasury yield also is about three basis points lower to 4.38%. Gold continues to recover. Recall that it had fallen six consecutive sessions until last weekend and has been up every day this week. It settled last week near $2563 and is now near $2670. January WTI is trading quietly inside yesterday's range (~$68.65-$70.00). 

Asia Pacific

There are two developments in Japan to note. First, BOJ Governor Ueda indicated that the December meeting was live and that the impact of exchange rates on prices will be taken into account. This spurred a sharp recovery in the yen. Second, the weekly MOF portfolio flow data showed that after selling a record amount of foreign bonds (~JPY4.46 trillion or $29.1 bln) in the week through November 1, it has replaced half of them. Japanese investors bought JPY1.7 trillion on the weekend ending November 8 and another JPY967 bln in the week through November 15. Japanese investors bought foreign equities for the second consecutive week after a four-week divestment campaign.  China has taken two new initiatives recently. The first, which we have highlighted, removes the export tax rebate and/or lowered them on several products, including aluminum, copper, refined oil, battery components and non-metallic mineral products. This may be a modest measure to ease trade talks with Europe and the US. Second, Beijing announced it would end tariffs on 45 of the poorest countries in the world. Since most of these countries export commodities, the initiative may add to the deflationary forces gripping producer prices. 

The dollar peaked in North America yesterday near JPY155.90, stalling front of the JPY156 level where $980 mln in options expired. The greenback was sold to JPY155.10 before European markets closed and consolidated in the North American afternoon. It has been sold to about JPY154.10 today. US Treasury yields are also softer, and a break of JPY154 sets up a test on the week's low near JPY153.30. The Australian dollar traded poorly. It reached a five-session high in the local session yesterday near $0.6545 but trended lower from there to reach $0.6485. The Aussie managed to barely hold above Tuesday's low. (~$0.6480). Today, it is in about a quarter-cent range above $0.6500. The dollar pushed above CNH7.25 yesterday and closed above it for only the second time since August 2. The 30-day rolling correlation between changes in the offshore yuan and the yen remains firm near 0.65. The dollar is softer against the yuan today but confined to yesterday's range (~CNH7.2320-CNH7.2560). The PBOC continues to set the dollar's reference rate below market expectations, and this serves to limit the scope for dollar appreciation/yuan depreciation. The fix was set at CNY7.1934 (CNY7.1935 yesterday). The average projection in Bloomberg's survey was CNY7.22473. 

Europe

The euro was sold to a new low for the year last week, slightly below $1.05 but despite the escalation of regional tensions the euro has continued to consolidate. Two telecommunication cables appear to have been sabotaged (Germany-Finland, Sweden-Lithuania). A nuclear reactor malfunctioned in Finland last Sunday and another one on Monday. Both were expected to resume operation today. Another development in Europe has been the rise in natural gas prices. Cold weather and little wind have seen inventories drawn down. Prices have doubled from the late February low. The high energy prices do the European manufacturing sector no favor. The eurozone's preliminary manufacturing PMI will be released tomorrow. It has not been above the 50 boom/bust level since June 2022. In its November monthly report, published earlier this week, the Bundesbank cautioned that although the German economy surprisingly grew by 0.2% in Q3, the economic slump likely is continuing here in Q4. 

The euro traded on both sides of Tuesday's range (~$1.0525-$1.06) yesterday, but the close inside the range ostensibly neutralized the potential technical development. Still, it looks vulnerable and is pinned in the lower end of yesterday's range. The escalation of the war in Ukraine is doing the single currency no favors. A convincing break of $1.05 targets the low from last October near $1.0450. Sterling rose above $1.27 yesterday for the first time in four sessions on the back of the firmer CPI reading. It was met with sellers who drove the pound to $1.2730 as local markets were closing yesterday. Sterling mostly consolidated in the North American afternoon between $1.2640 and $1.2660. It has been sold through yesterday's lows (~$1.2630) and is set to challenge last week's low was slightly below $1.26. The year's low from April was near $1.2300. 

America

The flurry of US data that will be released today do not have the heft to make a marked impact on economic expectations. The larger-than-expected drop in US housing starts (and downward revision to the September series) is consistent with the evolving data that the economy appears to be slowing to a 2.0%-2.5% Q4 pace. Tomorrow's preliminary PMI may have a little more sway, but the market has showed a preference for the ISM surveys. Still, the PMI is expected to be little changed with the manufacturing PMI still below 50 for the fifth consecutive month. Fed expectations have stabilized in recent days, with around a 60% chance of a December cut, down from a little more than 80% in the middle of last week. By the end of H1 25, the Fed funds imply that about 55 bp of cuts will be delivered--that is two cuts and about a 20% chance of a third. Canada reports September retail sales tomorrow but Mexico reports today. The median forecast in Bloomberg's survey is for a 0.2% increase in September retail sales. The risk may be on the downside, as auto sales fell, and imports of consumer goods slowed. However, September GDP is behind us, though the 1.0% quarter-quarter expansion is subject to revision tomorrow. However more important than GDP and September IGAE survey, Mexico reports first half of November consumer prices. Both the headline and core are seen moderating on a year-over-year basis.

The US dollar pulled back from CAD1.41 at the end of last week to almost CAD1.3950 Tuesday and Wednesday. It has held today, and the US dollar is hovering around little changed levels but is holding below CAD1.40. The risk-off mood, illustrated by the heavy tone of US equities, seemed to have countered the effects of a continued easing of the US two-year premium over Canada. It is narrowing for the fifth consecutive session, and at 101 bp, it is the least since October 22. One must assume that the options struck at CAD1.40 that expire today have already been neutralized. Emerging market currencies remained out of favor yesterday and all, but a couple fell against the dollar. The Mexican peso was the hardest hit, losing 1%. The dollar held above MXN20.00 on Tuesday and traded above MXN20.33 yesterday. It is edging higher today and is recording new session highs in the European morning about MXN20.3650. The week's high was set Monday near MXN20.4465. Options for about $350 mln expire today at MXN20.50.