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Position Adjustments at Month-End and Ahead of FOMC Outcome Lifts the Greeenback

Position Adjustments at Month-End and Ahead of FOMC Outcome Lifts the Greeenback

Overview: A combination of month-end adjustments and positioning ahead of the outcome of tomorrow's FOMC meeting has taken the shine off equities and has helped lift the dollar. On the heels of yesterday's sharp decline on Wall Street, several large markets in the Asia Pacific region, including China's CSI 300, the Hang Seng, and both South Korea's Kospi and Taiwan's Taiex fell by more than 1%. Although the eurozone eked out a small expansion in Q4 22, the Stoxx 600 is sliding 0.8% in late morning turnover. In US futures, trading the S&P 500 is off about 0.35%, half as much as the NASDAQ. Bond markets are drawing some support with most European benchmark yields off 1-2 bp, while the 10-year US Treasury yield is slightly lower near 3.53%.

The US dollar is firm, with the Norwegian krone and Australian dollar leading the way, pulling back around 1%. The Dollar Index is at nine-day highs, having reached 102.60. Despite repeated attempts, the euro was unable to establish a foothold above $1.09 and was sold back to around $1.08 today. Sterling was turned back from $1.24 yesterday and approached $1.23 today. The Japanese yen is the best performer in the G10 and is little changed, though the greenback has held above JPY130. Among emerging market currencies, only the Taiwanese dollar has escaped the US dollar's advance. Gold has taken it on the chin. It held $1950 last week and has approached $1900 today, slipping through the 20-day moving average (~$1904) for the first time this month. It has not closed below the 20-day moving average since November 3. 

Asia Pacific

China's January PMI readings will strengthen optimism around the re-opening. The manufacturing and non-manufacturing (includes construction and services) both move above the 50 boom/bust level for the first time in four months. Economists anticipated the improvement in the manufacturing PMI to 50.1 (from 40.7), but the non-manufacturing PMI surprised to the upside. It surged from 41.6 to 54.4.  The median forecast in Bloomberg's survey was for 52.0.  The composite rose to 52.9 from 42.6.  Still, it seemed to confirm what was more or less assumed and market showed little initial reaction. Separately, weaker output and falling producer prices (someone's income) led to a further decline in total industrial profits in December (-4.0% year-over-year cumulative). It is the biggest loss since August 2020.

Japan reported December employment, retail sales, and industrial production figures today. The labor market was little changed with 2.5% unemployment. Retail sales recovered (1.1%) after falling 1.3% in November. Industrial output slipped 0.1% in December. The median forecast in Bloomberg' s survey was for a 1% decline. 1% last month. Q4 GDP is not out until the middle of next month, but expectations are for a strong recovery after a 0.8% contraction in Q3. Foreign demand, as reflected in exports, has been softening, and domestic demand has been weak (household spending flat in Oct-Nov). Consumption accounted for about 57.1% of Japan's GDP in Q3 22 and 55.4% in Q2 22 (China consumption, which many argue is very low, was about 54.5% in 2021).

Australia reported dreadful December retail sales. Instead of falling by 0.2% as the median forecast in Bloomberg projected, Australian retail sales tumbled 3.9%. It is the largest decline since August 2020. Some sales were brought into November and Black Friday, and the November gain was revised to 1.7% from 1.4%. Consumption is about 60% of Australia's GDP. At the same time, Australia reported slower than expected credit growth in last month. The futures market looks for a peak in the overnight target rate of 3.75% from the current 3.10%.

The dollar traded on both sides of the pre-weekend range yesterday against the Japanese yen and closed above its high. However, there is has been no follow-through buying, and the greenback remains mired in a narrow range of about half a yen above JPY130. Last week's high was slightly above JPY131.10. The Australian dollar peaked last week near $0.7140, and today's setback has seen it approach $0.7000. It has now retraced about half of its rally from the January 19 low near $0.6870. The next retracement (61.8%) is around $0.6975 and the 20-day moving average, which it has not closed below since January 3 is about $0.6965. Despite the favorable PMI readings, China's CSI 300 fell a little more than 1% today, its biggest loss since before Christmas. Still, the yuan resilient in the face of the broader dollar gains and traded quietly within yesterday's range (~CNY6.7450-CNY6.7930). The PBOC set the dollar's reference rate tightly against expectations (CNY6.7604 vs. CNY6.7601). 


A few hours before the aggregate Q4 eurozone was reported, France announced that its economy grew by 0.1% in Q4, defying expectations for a flat quarter. Spain surprised to the upside last week. Its GDP expanded by 0.2% increase of 0.1%, helped, it appears, by a decline in import and stronger household spending in December. On the other hand, Italy joined Germany in reporting a small contraction. In aggregate the eurozone economy grew by 0.1% in Q4 for a 1.9% year-over-year pace.

Tomorrow, ahead of Thursday's ECB meeting, the preliminary estimate of January's CPI will be published. Early indications from Germany states, which were due today, have been postponed until next week, due to base year changes. French figures today showed an increase in the EU harmonized measure to 7.0% from 6.7%. The cyclical high was reported in October and November 2022 at 7.1%. Recall that yesterday's Spain's figures also disappointed with the harmonized measures accelerating at 5.8% from 5.5%. The aggregate CPI is expected to rise 0.1% this month after a 0.4% decline in December. The year-over-year rate is seen easing to 8.9% from 9.2%, while the core is expected to slip 5.1% from 5.2%. 

The UK reported weaker than expected mortgage lending and approval last month. Net consumer credit rose by about half of the GBP1.1 bln increase that was projected. The news played into IMF's report that see the UK economy the only G7 country to be in a recession this year and anticipates a 0.6% contraction. In October, the IMF had forecast a 0.3% expansion. Note that the expansion that the IMF had projected was calculated before the unfunded stimulus of the short-lived Truss government was proposed. The IMF did not cut its forecast of the other G7 countries in its update and lifted the global projection to 2.9% this year from 2.7%.

The euro's push above $1.09 yesterday was not sustained and it settled near $1.0850. Follow-through selling today saw it approached $1.08, matching its lowest level since January 19. Broadly speaking the price action looks like position adjustment on month-end and ahead of outcome of the FOMC meeting tomorrow. The 20-day moving average comes around $1.0795. The euro last closed below it on January 5. With the help of the better-than-expected GDP figures, the euro recovered to about $1.0835, where sellers re-emerged. Resistance may extend back to the $1.0850 area while the initial downside risk may extend to around $1.0760 on a break of the $1.08 area. Sterling again was turned back yesterday from the $1.24 area and today's pressure pushed it to close to $1.23, a four-day low. Last week's low was near $1.2265, and the 20-day moving average is slightly lower (~$1.2260). They represent the next target. There is little chart support below there until closer to $1.2170.


Both Adam Smith and John Maynard Keynes wrote about the globalization of their eras. What we call globalization these days seems incomprehensible if one does not accept the distinction between two strategies of servicing foreign demand:  exports, the traditional channel, and direct investment, which, in deed, even if not in word, is the preferred US strategy. Sales by majority-own affiliates of US multinationals have exceeded US exports since data began being collected in the early 1960s. Direct investment entails building/buying production facilities abroad. The rise of trade in parts and semifinished goods speaks the to the extension of the division of labor. Owing to advancements in command, control, and communication, and the decline in shipping cost, the different parts of the production process can be disbursed across national frontiers. The tax arbitrage and shuffling of intellectual property is an excess and parasitic, but they are not intrinsic to globalization. Those activities are largely accounting entries more than the part of the circuit of capital. The US direct investment strategy was being implemented long before capital was liberated, which started in earnest only in the late 1970s and early 1980s.

Looking for concrete measures? Take a look at the Activities of US Multinational Companies in a recent BEA report for 2020.  Let's focus on something that is unlikely to be exaggerated or distorted for tax purposes, employment. The multinational businesses employ about 28.4 mln employees in the US in 2020 and around 14 mln abroad. More than half are in high-wage economies, such as Australia/New Zealand (1.35 mln, though ~85% in Australia), 1.18 mln in Canada, 780k in Japan, and 4.76 mln in Europe (including 1.5 mln in the UK). If our first point is that modern globalization is about direct investment, the second point is that US direct investment does not appear mainly driven by low wages, but the proximity of demand. Even in developing regions, the US multinationals typically employ more people in high wage areas. Israel, for example, accounts for more than half of the US companies' employment in the Middle East. Mexico accounts for almost 80% of US affiliate employment in Central America. As the economist Joan Robinson quipped, "The misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all."  Still, China and India stand out. Of the roughly 4.9 mln employed by US majority owned affiliates found in the Asia-Pacific region, India (1.5 mln) and China (1.2 mln) account for about 55%. Even then, other considerations besides cheap labor standout, like English-speaking Indians, and the size of China's domestic market (e.g., GM, McDonalds, Starbucks, etc.).

The US reports Q4 Employment Cost Index, which is understood as a better measure that average weekly earnings, whose frequency captures the market's attention. The ECI remains elevated compared with pre-Covid levels. House prices are also on tap and expected to have continued to soften in November. The Conference Board's consumer confidence survey is unlikely to elicit much of a market reaction. Canada reported November GDP. A 0.1% expansion is expected for a 2.7% year-over-year pace. Still, with the Bank of Canada declaring a pause last week, the data will be of little consequence. Mexico reports Q4 GDP. A 0.3% expansion is projected, which translates into a 3.4% year-over-year rate. That is down from almost 4.3% in Q3, but still a relatively good number for Mexico, and better than the first two quarters of 2022 and Q4 2021.

After finding good demand near CAD1.3300, the US dollar jumped to CAD1.3390 yesterday and has surged to nearly CAD1.3460 today. The risk-off mood seems to be the key driver. Resistance is seen in the CAD1.3500-20 area. Initial intraday support may be in the CAD1.3420-40 band. Some US dollar buying may be related to the $1.22 bln option at CAD1.3400 that expires today. The greenback is bid against the Mexican peso. It initially slipped through yesterday's low near MXN18.75 but has now recovered through yesterday's high (~MXN18.81). A close above there would be a favorable technical development and suggest potential toward last week's high around MXN18.9250.

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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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