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Dollar Consolidates Amid Rate Volatility

Dollar Consolidates Amid Rate Volatility

Overview: The dollar is consolidating its recent moves as interest rate swings continue. The US two-year yield has traded in a nearly 28 bp range in the first two sessions this week, and near 4.88% now, it is 18 bp lower since last Friday's close. The 10-year yield is slipping below 4.50%. It reached almost 4.70% on Monday and had fallen to almost 4.40% yesterday. Part of this reflects the shift in overnight rate expectations. The implied yield of the December 2024 Fed funds futures has traded between almost 4.70% to 4.42% and is now about 4.49%. Separately, a continuing resolution into early next year will prevent a partial US government shutdown tomorrow.

The dollar bloc currencies are the poorest performing G10 currencies today, while the dollar has steadied above JPY151.00. European benchmark 10-year yields are mostly 4-6 bp lower. Spain's Socialist Party's Sanchez looks to have a new political lease on life with disparate coalition but there seems to be little market reaction. Spanish bonds have marginally underperformed in recent days. Japan's 10-year yield is below 80 bp and is near the lowest in a month. Equities are trading with a heavier bias. Taiwan, South Korea, and India are exceptions in the Asia Pacific region. Europe's Stoxx 600 is threatening to end a three-day advance. US index futures are also trading lower. Gold is firm, but within yesterday's range. Resistance is seen in the $1970-80 area. US oil inventories are at three-month highs, and this helped send December WTI 2% lower yesterday. Follow-through selling today saw the contract today to almost $75.65. A low near $74.90 was seen last week. Before then, it has not been below $75 a barrel since July.

Asia Pacific

Japan's trade balance swung back into deficit in October (-JPY662.5 bln or ~$4.4 bln) from a JPY72 bln surplus in September. The deficit has averaged about JPY856 bln a month this year. The average monthly shortfall in the first ten months of 2022 was JPY1.68 trillion. The weakness of the yen notwithstanding, exports rose 1.6% in the year through October, while imports fell 12.5% year-over-year. Net exports shaved Japan's Q3 GDP by 0.1 of a percentage point after flattering it by 1.8 percentage points in Q2 and subtracting 0.2 percentage points in Q1 23. Japanese exports to China are off 4% year-over-year in October, while exports to the US are up 8.4% and shipments to Europe have increased 8.9%.

An important agreement was struck yesterday that will likely influence the outcome of January's election in Taiwan, which could have global implications. Simply put, the two main opposition parties, the Kuomintang and Taiwan's People's Party announced that will run a united ticket to defeat the more independent-minded Democratic Progressive Party. The DPP candidate, Vice President Lai Ching-te has been leading in the polls, but unified opposition ticket looks likely to close the gap. It will be decided over the weekend, following internal and public polls, whether the KMT candidate Hou Yu-ih or the TPP candidate Ko Wen-je will lead the fusion ticket. Foxconn founder, Terry Gou, is running as an independent after losing his bid for the KMT nomination. Polls showed him drawing less than 10% of vote before yesterday's agreement, which would seem to undermine his already poor chances.

Australia created 55k jobs last month, but it was not sufficient to prevent the unemployment rate from rising to 3.7% from 3.6%. The participation rate rose to 67.0 from a 66.8% (initially 66.7%). However, after losing 36.5k full-time positions in September (initially -39.9k), Australia recouped 17k. The bulk of the job gain was part-time positions (37.9k after 44.3k in September. RBA Governor Bullock recently acknowledged some easing in the labor market.

As US rates rebounded from what seemed like an exaggerated response to Tuesday's CPI, the dollar recouped most of its losses against the yen. It first tested the JPY150 area in early North American turnover, where options for $2.7 bln expire today, and after the slightly better than expected retail sales report and softer than anticipated producer prices, the greenback spiked to new session highs. It climbed to about JPY151.40 in the North American afternoon and has large held below it today. The dollar has also held above JPY151.00. The Australian dollar's rally stalled slightly above $0.6540, its best level since August 10, as the US dollar recovered more broadly after the US data. The Aussie fell to about $0.6485 before catching a bid that drove it back to around $0.6530. Yesterday's pullback was extended to almost $0.6460 today, meeting the (38.2%) retracement of the rally from last Friday's low (~$0.6340). The Australian dollar recovered to $0.6500 before stalling in the European morning. Range-trading seems the most likely scenario today in North America. The greenback is little changed against the Chinese yuan. It is trading quietly within yesterday's range, recording a lower high for the third day running. The PBOC set the dollar's reference rate at CNY7.1724 (vs. CNY7.1752 yesterday). The average projection in Bloomberg's survey was for CNY7.2453, practically unchanged from the previous day. 


Germany adopted a "debt-brake" after the Great Financial Crisis that limits annual net new borrowing to 0.35% of GDP. There are exceptions for emergencies, but the Merkel and now the Scholz government create off-budget facilities. There are around 30 off-budget facilities. Yesterday, Germany high court dealt a blow to the government's shift of 60 bln euros for pandemic relief to an off-budget fund for climate change, claiming it violated constitutional law. The court ruled that the off-budget fund (raised to 212 bln euros for the 2024-2027 period must be reduced by the 60 bln euros. It is not immediately clear if the court's ruling impacts the other off-budget special funds. Chancellor Scholz promised a quick response but acknowledged that there would be a significant impact on budget policy at state and federal levels. 

If investors are nervous ahead of tomorrow's Moody's rating review of Italy it is not evident in the markets. Italy's 10-year premium over Germany has narrowed by about six basis points over the past week and the two-year premium has narrowed by almost 10 bp. Indeed, the 10-year premium is below 180 bp, the smallest in nearly two months. The two-year premium is near 63 bp, around the 200-day moving average and the least in almost two months. The new EC forecasts project that Italy will have a budget deficit of 4.3% of GDP in 2025 rather than the 3.6% shortfall the government anticipates. That will translate into a debt burden of nearly 141% of GDP in 2025. Recall that Moody's rating of Baa3 puts Italy one step into investment grade status. The outlook is negative by the rating agency.

The euro pulled back to almost $1.0830 yesterday, as the single currency held on to the lion's share of Tuesday's 1.7% surge, and it is holding today too. The (38.2%) of its recent rally (from last Friday's low around $1.0655) is found near $1.08 and 200-day moving average is slightly above there. Some more consolidation seems the most likely scenario. Sterling's price action is similar. It gave back a cent to approach the $1.24 area. The losses were extended to almost $1.2375 today to meet the (38.2%) retracement of the rally from last Friday's low (~$1.2185) near $1.2385. The next retracement (50%) is closer to $1.2350, and options for about GBP450 mln expire today at $1.2360. 


US retail sales were a bit stronger than expect while the producer prices were weaker than anticipated. The net impact was to lift US rates after the sharp slide on Tuesday and lent the greenback support. October retail sales slipped by 0.1%, the first decline in seven months. Yet, excluding autos and gasoline, sales increased by 0.1%. Gasoline sales were off 7.5% as the average price fell by about 20 cents. Shoppers were more active in September than previously reported. Retail sales then were revised to 0.9% from 0.7%. Producer prices unexpectedly fell by 0.5% month-over-month, the largest fall since April 2020, led by weaker gasoline prices. Excluding food and energy, producer prices were flat last month. The 2.4% year-over-year increase in core prices was the least since the start of 2021. Producer service prices were flat after rising for the past six months. The two-year breakeven (difference between the yield of the conventional note and the inflation protected security fell to 2.11% yesterday, the lowest in nearly a month. The 10-year breakeven fell to almost 2.27%, its lowest since October 11 and near the 200-day moving average. 

This week's deluge of US data continues today. The most important is the October industrial production report, which is expected to have fallen and offset in full September's 0.3%. Manufacturing may be hampered by the auto strike. Import and export prices are falling on a year-over-year basis and are seen falling month-over-month in October. Weekly jobless claims have been 200k-220k for the past two months, but continuing claims continue to edge higher (seven consecutive weeks), which is consistent with slower hiring. The November Empire State manufacturing survey was stronger than expected (9.1 vs. -4.6 in October) and today sees the Philadelphia business outlook and the Kansas Fed manufacturing survey. The NY Fed updates its service activity survey. The TIC report on portfolio capital flows will be released late in the session.

After the large outside down day on Tuesday, the greenback's losses were extended to CAD1.3655 before corrective forces took hold. The US dollar recovered to around CAD1.3685 in choppy even if sideways price action. In a near-term consolidative/corrective, the greenback can recover into the CAD1.3725-50 area. There at $1.35 bln in options at CAD1.3750 that expire today. The greenback marginally extended its recent losses against the Mexican peso. It fell to about MXN17.29. Today, it has taken set a new low for the month slightly below MXN17.26 as the dollar extends its losing streak for a fifth consecutive session today. Brazil's markets were closed yesterday for a national holiday and Latam currencies were mixed. The Mexican peso was joined by its Chilean counterpart in edging higher against the dollar, while the Colombia and Argentina's pesos were the worst performing among the emerging market currencies yesterday, falling 0.8% and 1.35%, respectively. Colombia reported weaker than expected Q3 GDP (0.2%) which saw the year-over-year rate contract by 0.3%. The market is nervous ahead of this weekend's run-off presidential election in Argentina and many suspect another devaluation is likely soon.

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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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