by Marc Chandler
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The dollar fell against all the G10 currencies last week. The dollar-bloc currencies, sterling, and the Scandis led the move, appreciating by about 0.55%-1.40% against the US dollar. The dollar bloc and sterling recorded new highs for the month ahead of the weekend. Against the others, the dollar spent most of last week consolidating after its recent losses were extended at the start of the week. Still, our review of the technical condition warns that the US dollar's pullback appears to be entering its final stages, with retracement targets being met and momentum indicators stretched.
In terms of high-frequency economic data, there are a few highlights in the week ahead. The US CPI suggests the November PCE deflator will slow after being stuck at 3.4% since July. The eurozone's preliminary November CPI may edge lower to 2.7%, down from 10.0% in November 2022, though this might be a bottom for a couple of months. China's PMI may find some traction from the rash of measures recently announced to support the economy and property market. The Fed's Beige Book is due Wednesday, but it is unlikely to change ideas that central bank is on hold. The Reserve Bank of New Zealand meets the same day and is also seen standing pat. The delayed OPEC meeting is now scheduled for Thursday, which is also when COP28 starts. Ending the week on December 1, Canada reports its November employment situation and Federal Reserve Chair Powell speaks at two venues.
United States: The market wants to see confirmation of its two priors: that growth is slowing markedly, and price pressures are cooling. Reports that could impact GDP forecasts include the October trade balance (likely a slightly larger deficit), retail inventories (big jump in Q3), personal consumption expenditures (to slow to around 0.2% from 0.7% in September and an average of 0.6% this year), construction spending (median forecast in Bloomberg's survey is for 0.4%, which would match the September gain), and November auto sales (median forecast is for an unchanged 15.5 mln unit SAAR pace). There seems to be little doubt that the world's largest economy is slowing. The question is about the magnitude. It is important that price pressures also continue to moderate. The CPI (and PPI and imported prices) suggest price pressures have eased, which should be confirmed by the PCE deflator. A 0.1% month-over-month increase will allow the year-over-year rate to slow to 3.0%-3.1%. That would be the lowest since March 2021 and follows four months stuck at 3.4%. The core rate may edge up by 0.2%, which would still allow the year-over-year rate to slip to 3.5% from 3.7%.
The implied yield of the December 2024 Fed funds futures rose by about 8.5 basis points last week and at about 4.59%, the market has 74 bp of easing discounted. It had been flirting with four cuts recently. The Dollar Index recovered from a low near 103.15, its lowest level since early September, to about 104.20 were it stalled. It hovered around the middle of the range ahead of the weekend. The 103.45 area is the (50%) retracement of its rally from mid-July (~99.60) to the early October high (~107.35). The 200-day moving average is about 103.60. The next retracement (61.8%) is closer to 102.55. Momentum indicators appear to be basing in over-extended territory. A move above 104.25 could target the 105 area.
China: Beijing and the PBOC have announced several initiatives in recent weeks to support the economy, and it would be disappointing if the measures failed to bolster sentiment among the purchasing managers. While interest rates have been left unchanged, the PBOC has made sizeable injections of liquidity. The central government will boost its deficit by CNY1 trillion and is considering launching another CNY1 trillion fund to support public housing and urban renewal. The PBOC launched a facility to help relieve the debt stress of some local governments. President Xi seemed to have gone on a charm offensive with Mastercard getting its long-awaited permission to enter into a local JV, considering ordering Boeing Max 37 airplanes, new soy purchase orders, will lend the US a couple of pandas, and after repeated denials it can do anything about the fentanyl trade, more efforts were promised. That said, reports suggest that China's aerial harassment of Taiwan continued. US gestures are not clear outside of easing export restrictions on one Chinese company.
The yuan has had its best two weeks since early January, rising by about 1.9% against the greenback. Even as the dollar fell, the PBOC set its dollar reference rates at lower levels every session last week. It began the week at CNY7.1612 and the fix ahead of the weekend was at CNY7.1151. The gap between the market projections (Bloomberg survey) and the actual fix has also narrowed over the past two weeks. While many are now talking about a test on the CNY7.00-05 area in the coming weeks, we suspect the greenback may rise first toward CNY7.19-CNY7.22.
Japan: Japan has an extraordinarily accommodating monetary policy and fiscal support in the form of a 5.5% deficit/GDP this year. The government is in the final stages of approving another supplemental budget. In terms of the OECD's measure of purchasing power parity, the yen is undervalued by historical proportions. And yet the economy struggles. It has contracted in two of the past four quarters. Private domestic demand and capital expenditures have fallen for the past two quarters. This week's data, especially October retail sales and industrial production will shed light on economic activity as Q4 got underway. Modest gains are expected. Disappointment, and any sign that the economy may still be contracting, will likely impact expectations for the Bank of Japan. Japan's October employment report is due on December 1. Despite above-target inflation, the Japanese government and the BOJ stand out among the G10 as the only ones encouraging higher wages. Unemployment was mostly 2.5%-2.7% in 2022. This year's range was set in Q1: 2.4%-2.8%, and in September, it was in the middle of the range.
The dollar appears have carved a potential double top against the Japanese yen this month near JPY151.90. The low between the two highs was about JPY149.20 (neckline). The measuring objective is found by rotating the pattern around the neckline and that would give a target of around JPY146.50. Last week, the dollar stopped shy of that at around JPY147.15, and proceeded to recover to about JPY149.75, where it stalled. Nearby resistance is seen a little above JPY150 and the 20-day moving average is a little higher (~JPY150.25). The momentum indicators look poised to turn higher in the coming days.
Eurozone: The highlight of the week is the preliminary estimate of November CPI. The dramatic improvement that has seen the year-over-year rate slow from 5.3% year-over-year in August to 2.9% in October may have a little more downside scope. A decline in German and Italian consumer prices in November, may allow the aggregate pace to slow to 2.7%, according to the median projection in Bloomberg' survey. Still, the risk is that headline CPI moves higher in the coming months December and January. The swaps market has almost a 60% chance that the first cut will be delivered next April. This may be pushed back into Q3 24. Last week there were two highlights. First, the German Constitutional Court ruling against the government's efforts to re-purpose off-budget Covid funds for climate change. This blew a 37 bln euro (~$40 bln) hole in this year's budget and prompted a reluctant Finance Minister Linder to endorse the debt brake waiver again. This intensified concerns about increased government debt issuance and when the Bundesbank acknowledged that book value of bank bond holdings are above market values, meaning that selling would realize losses. Second, the anti-immigration and anti-EU Freedom Party secured the more seats than any other party in the Dutch election. Still, with 35 seats out of 150, and few willing to be in a coalition with the Freedom Party, a period of uncertainty will persist for some time. The right appears in the ascendancy in several European countries, with Le Pen in France and the AfD in Germany polling better. Italy's right-wing government, led by the Brothers of Italy, has not been as disruptive as many feared. Prime Minister Meloni has been pro-NATO and pro-EU and finds common ground with Germany, UK, and arguably the US on its immigration stance.
The euro stalled on November 21 a liitle above $1.0960, the (61.8%) retracement of its losses since the July high (~$1.1275 to ~$1.0475). It pulled back to almost $1.0850 before recovering to $1.0950 ahead of the weekend. The momentum indicators are stretched, and the Slow Stochastics have turned lower. The US premium over Germany for two-year money narrowed in the first four sessions last week to the lower end of its nearly two-month range (~185 bp) but steadied ahead of the weekend and looks poised to recover. $1.10 offers psychological resistance. On the downside, a break of the $1.0850-75 area would likely signal that the nearly two-month advance in the euro is over, and a corrective/consolidative phase is at hand. That said, it may take a break of the $1.0795-$1.0800 area to signal a proper correction rather than consolidation.
United Kingdom: The UK reports October consumer credit and mortgage lending in the week ahead. These are not market movers even in the best of times. Since the Autumn statement in the middle of last week, UK rates and sterling have risen. The 10-year Gilt yield has risen by nearly 20 bp, and the two-year yield is up nearly as much. On November 20, the swaps market implied slightly more than a 55% chance of a cut by the end of May. By the end of last week, the chances were reduced to practically zero. Sterling reached $1.2615 ahead of the weekend, its best level since September 5, and met the (38.2%) retracement of the losses since the July high ($1.3140). The next retracement (61.8%) is about $1.2720. The momentum indicators are stretched. Initial support is around $1.2500, while a break of last week's low near $1.2450 could spur a 3/4-1-cent decline.
Canada: In a quirk of the calendar, Canada will report its November employment data on December 1, a week before the US. Canada did lose full-time jobs in October (3.3k) and there is a general sense that the labor market is slowing. The unemployment rate has risen to 5.7% from 5.0% in April. The participation rate (65.6%) is unchanged from April. However, Canada grew 288.1k full-time positions through October compared with 285k in the first ten months of last year. The 12-month moving average of the change in the annual wage rate for permanent employees continues to hover around 5%, almost double of the 12- and 24-month average before Covid. Canada also reports Q3 GDP. The 0.4% median forecast in Bloomberg's monthly survey seems a little optimistic given that the monthly GDP estimates were flat in July and August after contracting by 0.2% in June. The market has recognized the economic trajectory and taken the two-year yield down from nearly 5% in early October to the 200-day moving average last week near 4.35%. Stronger than expected September retail sales (0.6% vs. median forecast of a flat report) helped rates and the Canadian dollar recover. The two-year yield approached 4.50% before the weekend. According to the swaps market, there is now about a 50% chance of a rate cut next April, down from more than 80% around middle of the month. The greenback finished last week with a push below the trendline drawn off the mid-July low for the year, the late September, low and the November 3 low, found near CAD1.3655. It made a new low for the month slightly below CAD1.3600 ahead of the weekend. A convincing break of it, could spur a move toward the CAD.1.35 area.
Australia: The market has not been persuaded by news recently that Australia's employment rose by twice what was forecast by the median in Bloomberg's survey or the hawkish tone by central bank Governor Bullock. Annual wage growth reached a 14-year high in Q3 of 4%. The futures market has discounted a little more than a 20% chance of a hike in H1 24. As recently as November 14, the market had more than a 55% chance of a hike. The wage and employment data were released on November 15-16. Australia reports October CPI on November 29. The pace had slowed from 8.4%, the peak set at the end of last year to 4.9% in July. In August and September, it reaccelerated to reach 5.6%. It is expected to unwind the September gain and return to 5.2%. This would typically be the highlight of the week. However, Bullock's comments draw attention to demand and the market may be sensitive to the retail sales report out (November 28), the day before the CPI. Retail sales jumped by 0.9% in September and when this was reported on October 30, three times higher than expected that seemed to prompt some to anticipate the rate hike that was delivered a week later. Retail sales rose by an average of 0.6% in Q3 after a flat Q2 and an average of 0.8% in Q1. A slowdown in retail sales and CPI could cap the Australian dollar in the $0.6600 area, which houses last week's high, the (50%) retracement of the losses since the July high (~$0.6900) and the 200-day moving average. The momentum indicators are stretched. Initial support may near $0.6520.
Mexico: The upcoming data will showcase Mexico's strengths. Exports near record levels despite the appreciation of the peso over the last two years. The near-shoring/friend-shoring narratives favor it. Mexico's trade deficit trade deficit of about $10.1 bln through September is less than half of what it was in the first nine months of 2022 (~$25.7 bln). And that trade deficit is more than covered by worker remittances (~$47 bln in Jan-Sept 2023 vs.~ $43 bln in Jan-Sept 2022). Mexico's economy is among the region's best performers, and the manufacturing PMI and IMEF surveys should confirm it. At the end of last week, Q3 GDP was revised higher to 1.1% (quarter-over-quarter), up from 0.9% initially. Note that Brazil's economy may have stagnated or contracted slightly in Q3 and Colombia unexpected contracted by 0.3% in Q3. The central bank's inflation report will be published on November 29. Mexico's institutional strength, including the independence of Banxico and the judiciary, may allow for compromises, as it were, in other areas without alienating investors. While the central bank hesitates to begin its easing cycle, it has begun adjusting its language, seemingly validating expectations of a cut before the mid-year election. Last week, dollar set the range on November 21 (~MXN17.0655-MXN17.2690). It held below MXN17.20 ahead of the weekend. The objective of the double top carved last month anear MXN18.50 is near MXN17.00. The momentum indicators are stalling. A move above last week's high could spur dollar gains toward MXN17.40-50.
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