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China Equity Slump Continues, while Dollar Extends Consolidation

China Equity Slump Continues, while Dollar Extends Consolidation

Overview: The foreign exchange market is quiet to start the new week. As the North American session is about to begin, the dollar is mostly +/- 0.10% against most of the G10 currencies. The Swedish krona is the notable exception, rising about 0.25% against the US dollar amid good demand for its bonds today. Emerging market currencies are mostly lower. The Taiwanese dollar is the strongest in the complex so far today, rising about 0.30% against the dollar, despite a dramatic 16% drop December export orders. The two trend moves among Asia Pacific equities continued. Japanese indices made new 30-year highs, while Chinese stocks on the mainland and Hong Kong continued to be pummeled. Europe's Stoxx 600 is up about 0.4%, while US index futures are extending their gains that carried the S&P 500 and Nasdaq 100 to record highs before the weekend.

Bonds are bid. Benchmark 10-year rates are 3-6 bp lower in Europe. Of note, Italy's 10-year premium over Germany is around 155 bp to approach two-year lows. The 10-year US yield is slightly softer near 4.10%. The 2-year US yield is flat slightly below 4.40%. Gold is softer but trading quietly in around a $6-range on either side of $2025. March WTI is little changed near $73.40. Meanwhile, US natgas is lower for the fifth consecutive session. During this slump, it has fallen by almost a third. Europe's benchmark is off about 5% today and down around 15% since January 12. 

Asia Pacific

As signaled when the PBOC failed to cut the benchmark one-year Medium-Term Lending Facility rate last week, Chinese banks maintained their loan prime rates. Officials are understood to have signaled that more economic support will be forthcoming. The focus in Q4 23 seems more on quantities (loans and increased quotas) rather than price (interest rates). Consistent with this, many observers anticipate another reduction in reserve requirements. Meanwhile, Beijing purposefully popped the property bubble, and while it appears to have returned to industry as a vital engine of growth, it has not found a new place to park savings. The CSI 300 is off 35% in the three-year slide through 2023. Today's 1.5% loss brings the year-to-date decline to 6.2%. And this might understate the case. The index of mainland companies that trade in Hong Kong has fallen for the past four years and has been nearly halved. It is off another 13.3% since the start of this year. Given the hemorrhaging of the stock market, it ought not be surprising that Beijing seeks to avoid a vicious cycle by keeping the yuan stable. 

The dollar begins the week with a three-week rally in tow against the Japanese yen. It has been fueled by the backing up of US rates, and recognition that the BOJ, which meets this week, unlikely to adjust policy until at least April. The momentum appears to be stalling as the settlement for the last three sessions has been JPY148.12-16, according to Bloomberg. The greenback has been confined to about 30 pips today on either side of JPY148 in quiet turnover. The Australia dollar finished last week a smidgeon below $0.6600, its highest close since December 7. There are about A$500 mln of options at $0.6600 that expire today. It reached nearly $0.6615 in the local session before being sold back to around $0.6580 in late dealings. The Aussie needs to rise through the $0.6640-60 area to signal anything more substantial than consolidation. The US dollar continues to bump on a cap near CNY7.20. The PBOC set the dollar's reference rate at CNY7.1105 (CNY7.1167 Friday). The average in Bloomberg's survey was CNY7.1873 (CNY7.1953 on Friday). The greenback has slipped against the offshore yuan in the last two sessions and is practically unchanged now near CNH7.2030. 


The talk of is de-dollarization, but the evidence is scarce. SWIFT data provides evidence not of de-dollarization but de-euro-ization. The timing of lines up not with China's initiatives the Belt Road Initiative or the Asian Infrastructure Investment Bank but Russia's invasion of Ukraine in February 2022. According to SWIFT, and the end of 2020, the euro's share of global payments was 36.70%. At the end 2021, it was little changed at 36.65%. By the end of 2022, its shared slipped to 36.35%, and at the end of last year stood at 22.41%. The euro's share slipped near 14 percentage points last year and the dollar's share increased to 47.54% in December, an increase of 5.65 percentage points. At the end of 2020, the dollar accounted for 38.73% of payments using SWIFT. Sterling and the yen's share rose a little less than one percentage point in 2023 to 6.92% and 3.83%, respectively. The Chinese yuan's share on SWIFT rose to 4.14% from 2.15% at the end of 2022 and 1.88% at the end of 2020.

Chinese activity with Russia will not be reported on the SWIFT network, from which most Russian banks expelled, but on China's CIPS (Cross-Border Payment System), launched in 2015. Unlike, the US CHIPS (Clearing House Interbank Payment System) which settles payments between banks on a net basis, China's CIPS is a real-time gross settlement system. Several European officials have expressed concerns about the future use of the euro if Russia's reserves, which have been frozen, are given to Ukraine in some fashion to fund reconstruction. About 2/3 of the $300 bln of Russian funds are in Europe, meaning that its call is important. The Biden administration and many op-ed writers seem to focus on the legality and moral righteousness. Many in Europe seem to be more focused on the political and financial consequences.

The euro slipped by about 0.5% last week and settled the week below $1.09 for the first time since mid-December. It edged up to almost $1.0910 before being pushed back down toward session lows near $1.0885. The euro bottomed last week near the 200-day moving average, now around $1.0845. Sterling, confined to the $1.26-$1.28 trading range, tested the lower end last week. The rule of alternation suggests it will get closer to the upper end of the range next. It reached a four-day high near $1.2725 earlier today but could not sustain the upside momentum. It is straddling the $1.27 area. Speculators in the futures market have been covering shorts and adding to longs during the range-trading affair that began in mid-December. 


The Federal Reserve officials forecast, and statement reflected greater confidence in achieving the proverbial soft-landing at the December FOMC meeting, and the recent string of data provides even more encouragement. Last week's reports included stronger-than-expected retail sales, a small gain instead of a small loss in industrial output, and the lowest weekly jobless claims since September. The collapse of the Empire State January manufacturing survey sent the chins wagging but the negativity was blunted by the Philadelphia Fed's January business outlook, which improved slightly. The preliminary January University of Michigan's consumer survey was frosting on the cake. It not only rose more than expected to 78.8 from 69.7, but the two-month gain (from 61.3 in November, is the largest back-to-back gain since November-December 1992. The preliminary sentiment reading is the highest since July 2021. And inflation expectations eased a little more than expected. The one-year inflation outlook is for 2.9%, the lowest since the end of 2020 and down from 3.9% in January 2023. The five-year outlook slipped to 2.8% from 2.9%, matching last year's low. 

China Equity Slump Continues, while Dollar Extends Consolidation

Every business cycle is unique, but for obvious reasons this one is particularly unusual. Some indicators that have in the past been consistent with recession conditions continue to flash warning signals. Today's US leading economic indicators is such an example. The December LEI is expected to have fallen by 0.3%. What make is notable is not the magnitude but the duration. It has been falling without fail since April 2022. The six-month annualized pace has been associated past economic contractions. Yet, outside the trade and inventory induced contractions is the first two quarters of 2022, the US economy has growing above what the Federal Reserve estimates to be the non-inflationary long-term pace 1.8%. This quarter could snap it, but first the US will likely extend the streak of above trend-growth for in Q4 23.

The Canadian dollar's nearly 0.45% rally before the weekend was the largest advance in more than three weeks, seemingly helped by the risk-on reflected in the strong rally in US equity market. Also, we note that the swaps market now has about 106 bp of cuts this year compared with 135 bp at the beginning of last week. The US dollar settled on three-day lows near CAD1.3430 and slipped to around CAD1.3420 today. A break of CAD1.3400 targets the CAD1.3360 area next. The US dollar jumped up against the Mexican peso at the start of last week and trickled lower in the second part of the week. The continued decline of headline and core CPI in the first half of January (due mid-week) should encourage rate cut expectations. Initial support may be seen in the MXN17.00-05 area. The greenback settled near MXN17.0850 before the weekend and found sellers on a small bounce slightly above MXN17.14.

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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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