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BOJ Stands Pat, Exit Draws Closer, while HK Liquidity is Squeezed Easing Pressure on the Yuan

BOJ Stands Pat, Exit Draws Closer, while HK Liquidity is Squeezed Easing Pressure on the Yuan

Overview:  The dollar remains largely confined to its recent ranges as the consolidative phase extends. The Bank of Japan stood pat and revised its forecasts as it is seen drawing closer another adjustment in policy, with the market still favoring an April timeframe. A squeeze in the Hong Kong money market and talk of a large package to support the equity market helped lift the Chinese yuan for the third consecutive session and lifted Chinese stocks. Most emerging market currencies, led by the Mexican peso again, softer today. A handful of Asian currencies and the South African rand are resisting the firmer greenback.

Although Japanese stocks saw some profit-taking, the other large markets in the region rose helped by China and the rally in the US yesterday that saw new S&P 500 and Nasdaq 100 record-highs. Europe's Stoxx 60 is off about 0.2% after rallying about 0.75% yesterday. US index futures are trading with a slightly lower bias. US and European 10-year yields are 1-3 bp firmer, which puts the 10-year Treasury near 4.13%. The 10-year JGB yield edged up to almost 0.66%. Gold remains in a $2015-$2040 range that has recently been carved. March WTI posted an outside up day yesterday, trading on both sides of Friday's range and closing above its high. However, there has been no follow-through buying, which leaves the crude oil contract still chopping in a $70-$75 range.

Asia Pacific

As widely anticipated, the Bank of Japan stood pat. Nor is it expected to change policy at its next meeting in late March, though this cannot be entirely ruled out. However, an exit from its zero-interest rate policy is seen most likely in April. Ironically, at the end of this week, Tokyo's core CPI is expected to slip below 2% from the first time since May 2022. Tokyo's CPI is a good barometer of the national CPI but is slightly lower. That means that the national core reading could fall below the BOJ's 2% target in February or March. 

The Bank of Japan updated its economic forecasts. Growth in the current fiscal year, which is ending in March, was shaved to 1.8% from 2.0% and GDP in the next fiscal year it was raised to 1.2% from 1.0% and in FY25, the growth forecast was left unchanged at 1.0%. The core CPI forecast was unchanged at 2.8% for the current fiscal year, and reduced to 2.4% (from 2.,8%) for FY24 and was seen at 1.8% in FY25 (from 1.7%). The BOJ seemed more that the economy is moving in the first direction. The first thing tomorrow, Japan reports its December merchandise trade balance, which will confirm the third consecutive annual deficit. The 2023 deficit appears to be around half the magnitude of the 2022 shortfall. Also tomorrow, Japan (and Australia) will see the flash January PMI. Except for the November weakness, Japan's composite PMI held above the 50 boom/bust levels even in Q3 when GDP contracted. Australia's composite PMI remained below 50 throughout Q4. In fact, it averaged 46.9 in Q4 23, the weakest quarterly reading since Q3 21 (45). Still, Australia's economy expanded by 0.2% in Q3 23 and is expected to have matched in in Q4 23.

The dollar was little changed yesterday for the third consecutive session. The surge at the start of last week had given way to narrow range trading. The BOJ injected a bit of volatility and the dollar fell to a five-day low near JPY147 before it recovered to back to JPY148. Immediate resistance is seen near JPY148.20. The price action seems to favor a continuation pattern, which warns an upside breakout for the dollar. Yet, given how far the dollar has come in the last three weeks, and stretched momentum indicators, this leg up we envision may be the last before a more meaningful push lower. The Australian dollar settled poorly after reversing lower from a three-day high early Monday near $0.6615. It recorded the session low in late North American turnover slightly below $0.6570. It has largely been confined to that range today. It looks set to $0.6615 and a push through it could see a move toward $0.6640-50. A liquidity squeeze in Hong Kong and talk of a CNY2 trillion (~$278 bln). packaged to support the stock market helped lift the yuan today. The Hong Kong interbank rate rose (by 55 bp to 5.50%, the highest since last April). The PBOC set the dollar's reference rate at CNY7.1117 (CNY7.1105 yesterday) compared with the average in Bloomberg's survey of CNY7.2008 (CNY7.1873). The dollar held below its recent gap near CNY7.20 and fell to CNY7.1635, its lowest since January 12. It is the third consecutive session the dollar is trading heavier and the 0.3% decline is the largest this month. 


Tomorrow sees the eurozone and UK preliminary January PMI followed by the ECB and Norges Bank meetings on Thursday. The eurozone and UK economies are stagnant for all practical purposes. The eurozone composite PMI has been below 50 since last June and seemed to have bottomed in 46.5 in October but the upside has been unimpressive. It finished last year at 47.6 compared with 49.3 at the end of 2022. The manufacturing PMI put in a low at 42.7 in July and finished 2023 at 44.4. The service PMI bottomed in October at 47.8 and it ended the year at 49.0. The UK's composite PMI finished 2023 on a firm note at 52.1, the best in H2 23. Services continue to expand, and the services PMI was at 53.4 in December, the highest since June. The manufacturing PMI slipped 46.2, in December, its first decline in four months. It bottomed in August at 43.

The euro spent yesterday in a little more than a quarter-cent range above $1.0880. It made a marginal near five-day high near $1.0915 today but could not sustain the mild upside momentum and retreated to around $1.0880 in the European morning. We suspect it may find support around here and continue to broadly consolidate. Yet, we have not given the up the idea that correction to the Oct-Dec 2023 may not be over. Sterling is holding up better and firmed to a new six-day high near $1.2750. While sterling can try again for the upper end of its two-cent range around $1.2800, we are wary of a false break ahead of next week BOE meeting and the US employment data.


The Philadelphia Fed's non-manufacturing survey and the Richmond Fed's surveys are unlikely to have much impact ahead of the Wednesday's flash PMI, Thursday's Q4 GDP, and Friday's personal, income, and deflator data. Of note, the Empire State for January imploded, while the Philadelphia Fed manufacturing survey ticked up. Economists expected a sharp slowing in Q1 GDP but may have to revise up as the quarter progresses as it has with Q4 23 GDP. Note that the early call for January nonfarm payrolls is for about 155k. Jobs growth is slowing, but seemingly gradually. Also, Q4 23 GDP looks to be slightly above trend growth (the Fed estimates long-term non-inflation growth pace is 1.8%). The personal income and consumption data for December will be embedded into the GDP estimate. The monthly deflator is expected to be unchanged at 2.6%, while the core rate may slip to 3.0% from 3.2%.

The US dollar recouped half of the losses seen since last Wednesday's high near CAD1.3540. It initially saw those losses extended into activity yesterday to new four-day low near CAD1.3415 and reversed higher, despite the rise in US equities (risk-on) and the surge in oil (many still see the Canadian dollar as a petro-currency but find little statistical evidence). The CAD1.3500 area may offer initial resistance but last week's high near CAD1.3540 is more important. Above there, last month's highs in the CAD1.3600-20 area would be the next technical target. The US dollar traded on both sides of last Friday's range against the Mexican peso but failed to close above its high. Still, the bullish implications were clear, and the dollar has extended its gains toward MXN17.2840. The move above the MXN17.26 area targets the 200-day moving average and this month's high in the MXN17.3650-MXN17.3850 area. Last month's high was slightly above MXN17.5650.The greenback jumped even more against the Brazilian real, to reach its best level since early November of (~BRL5.0). The dollar faces an initial hurdle near BRL5.01, but a break of it could signal another 1% near-term gain. 


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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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