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Greenback Consolidates Near Recent Lows Ahead of Tomorrow’s US CPI

Overview: Fed Chair Powell did not push against the easing of US financial conditions when he ostensibly had an opportunity yesterday. This coupled with expectations of another decline in the US CPI, which will be reported tomorrow, has kept the greenback mostly consolidating the losses seen last Friday and Monday. With a light calendar today, continued sideways movement is the most likely outlook for the North American session today. The rise in US yields seen yesterday are being pared today. While Chinese equities softened, most other large bourses in the Asia Pacific area, gained, led by a 1% gain in the Nikkei, advanced. Europe's Stoxx 600 is recouping most of yesterday's losses, and US futures are a little firmer. Despite the surge in supply, the European bond market rally continues, and benchmark yields are off 7-9 bp today. February WTI is firm, though the API estimated a huge build of 15 mln barrels, which is confirmed by the EIA later today, it would be the largest increase in US crude stocks since early 2021. Asia Pacific In addition to boosting quotas for oil imports, reports suggest Beijing grant record quotas for local government special bonds and allow for a larger budget deficit target. To be sure, it is not strong stimulus seen in 2008, but a central government deficit of around 3% of GDP (slightly larger than the ~2.8% said to have been recorded last year) and CNY3.8 trillion (~$550 bln) would translate into a general government deficit of around 6% of GDP. The slowing of aggregate lending last month was the not signal. The policy signal seems to be one of greater economic pragmatism on a number of fronts, technology, property, lending, while still encouraging the reduction of off-balance sheet borrowing. China has also ended, or at least, eased its embargo on some Australian goods, especially coal. Separately, it was reported last week that China was backtracking from its CNY1 trillion subsidy effort for its semiconductor sector. The capital-intensive approach, a hallmark of China, worked well in other sectors, including solar panels, autos, and steel, but reports suggest senior officials are disappointed with the results to date in the semi space. It seems more likely that it will a different approach then abandon the strategic sector. Australia reported much stronger than expected November retail sales and new cyclical high in the new monthly CPI gauge. The median forecast for retail sales in Bloomberg's survey was for a 0.6% gain after a 0.2% decline in October. Instead, retail sales jumped 1.4%, the most since January, and the October decline weas revised away and replaced with a 0.4% gain. The "Black Friday" sales appeared to give a boost to household goods, apparel, and department store sales. The risk is that it borrows from the future. Consumer prices accelerated to 7.4% in November from 6.9%. The median forecast in Bloomberg's survey was for 7.2%. The trimmed mean measure rose 5.6% from a revised 5.4% (initially 5.3%). Separately, job vacancies fell 4.9% in the three-months through November. It is the second consecutive quarterly decline. In the quarter ending in August, vacancies slipped 2.8%. Australia reports December jobs data next week, and the central bank will see the traditionally quarterly inflation report (January 24) before the RBA meets on February 7. The cash target rate sits at 3.10%. Many observers are more inclined to see a 15 bp hike because to bring it back to quarter point increments.  The terminal rate is expected to be reached near mid-year around 3.75%, with less than 50% chance it reaches 4.0%. The dollar traded at a marginal new high for the week near JPY132.75, but without much momentum, perhaps as US rates come back softer. Support was found ahead of JPY132.00 compared with yesterday's low around JPY131.40. Japan reports November current account figures tomorrow, but it typically is not a market-mover. The Australian dollar is the strongest of the G10 currencies today, rising about 0.3% against the US dollar, but holding below yesterday's high (~$0.6830) and Monday's (~$0.6950).  While the inflation and retail sales data may have helped, new six-month highs in iron ore and copper prices (largely on the China story) are also seen as supportive. The greenback has held yesterday's range against the Chinese yuan (CNY6.7530-CNY6.7900) in quiet turnover. The yuan strength has not seen a strong pushback from Chinese officials. The PBOC set the dollar's reference rate slightly weaker than the median in Bloomberg's survey anticipated (CNY6.7756 vs. CNY6.7784). Europe The year has begun with dramatic issuance of investment grade bonds in Europe and the US. Eurozone investment grade corporates, including financial institutions, and sovereigns have raised around 145 bln euros in the opening two weeks of the year. Investment grade dollar issuance has surpassed $80 bln so far and now the US Treasury is joining. It sold $40 bln three-year notes yesterday. The yield was a little lower than the previous auction (3.98% vs. 4.09%) but generated a higher bid-cover (2.84x vs. 2.55x), and indirect bidders, which include asset managers and foreign central banks, took down more (69.5% vs. 61.7%). Some observers feared that demand for US Treasuries is drying up. Today the US sells $32 bln of 10-year notes and Thursday, $18 bln of 30-year bonds. Through yesterday, the US and eurozone benchmark yields are off sharply this year. The US 10-year yield is off 27 bp.  Eurozone 10-year yields have fallen 25-45 bp, with peripheral premiums over Germany narrowing (as is often the case in a falling rate environment). In Europe, UK 10-year Gilts have underperformed. The yield is off 10 bp.  However, the laggard in the G10 is Japan, where the 10-year JGB yield is up about nine basis points as it pushes against the new 0.50% cap. Germany and France reported stronger than expected November industrial output figures recently, but Spain disappointed today. Instead of falling by 0.4% as economists expected, industrial production fell by 0.7%, and adding insult to injury October's decline was revised to 0.6% from 0.4%. Separately, Italy surprised with a 0.8% surge in November retail sales. The median forecast in Bloomberg's survey was for a 0.3% fall. October's 0.4% decline was revised to a 0.3% fall. On Friday, the aggregate eurozone November industrial production data and trade balance will be reported. With a mild winter so far and low energy prices, which in turn could reduce the fiscal costs of subsidies, many are still hopeful of a short and shallow downturn. Next month, embargo on Russia's refined oil products starts. For the second consecutive session, the euro is trading in a narrow of about half-of-a-cent at the upper end of the range seen on Monday (~$1.0635-$1.0760). Recall that before the US employment data and ISM services, the euro had fallen $1.0485, its lowest level since December 7. This type of consolidation is often seen as construction. The next target above the $1.0760 is around $1.08. Ideas that tomorrow's US CPI will soften again appears to be encouraging the euro bulls to maintain positions even though the upside momentum has eased. Sterling also remains confined to Monday's range (~$1.2085-$1.2210) but is a bit softer. Still, it is holding above yesterday's low near $1.2110. Turnover is quiet. The UK reports November GDP data on Friday and appears at the mercy of the broad moves in the greenback until then. America Fed Chair Powell did not address the outlook for policy so much as to acknowledge that pursuing tighter policy may not be popular. BOE Governor Bailey and Powell pushed back against ideas that their central banks have an important role to play in climate change.  This is different from what we have heard from the ECB, the PBOC, and the BOJ. The other three Fed officials that have spoken this week (Bowman, Bostic, and Daly) have, in their own ways, expressed a hawkish view. Still, the Fed funds futures price in about a 1-in-4 chance of a 50 bp hike on February 2, virtually unchanged since the mid-December FOMC meeting.  Meanwhile, the Atlanta Fed's GDPNow tracker lifted its projection of Q4 growth to a heady 4.1% from 3.8% last week, owing to slightly better consumption and stronger domestic investment. The median Fed dot sees long-term non-inflationary growth at 1.8%. Note that no forecast in Bloomberg's survey with 56 respondents see growth above 3.0%, and that forecast of 3% is from Bloomberg's economic team. While the US and Canadian calendars are light today, including no scheduled Fed speakers, Mexico reports November industrial production, where economists expected a 0.3% decline. Yet the relative strength of the peso appears to be coming from the financial markets rather than the goods market, though exports to the US remain strong. The high interest rates and relatively stable peso makes for attractive carry strategies. Brazil's IPCA December CPI was a little firmer than expected and today the focus shifts to November retail sales where a small decline is anticipated. The former Justice Minister and a former commander of Brasilia's military police have been arrested over the weekend attack on the capital. Bolsonaro, who seemed to condemn the violence, reportedly used his Facebook account to share videos of voter fraud conspiracies. Still, the Brazilian real recouped Monday's loss in full yesterday, rising a little more than 1% and the Bovespa extended its gains for the fifth consecutive session. The US dollar fell to roughly seven-week low on Monday against the Canadian dollar near CAD1.3360. It has been consolidating since with a firmer bias. It reached CAD1.3445 yesterday and has held just below it today, while remaining above CAD1.3400. A move above CAD1.3465, which would probably accompany weaker US equities, could spur gains toward CAD1.3500. Meanwhile, the greenback has edged lower against the Mexican peso and is poised to challenge the MXN19.04 level seen at the end of last November. The MXN19.00 may offer psychological support, and the lower Bollinger Band is found slightly above it, but recall that before Covid struck, the greenback was near MXN18.55. 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Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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