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The Dollar Goes Nowhere Quickly

The Dollar Goes Nowhere Quickly

Overview: The dollar continues to consolidate broadly after the dramatic price swings at the end of last week. For the most part, the greenback remains inside yesterday's ranges, which were inside last Friday's. The G10 currencies are a little heavier today, except the Japanese yen and Norwegian krone, which are posting small gains. Indeed, the greenback is near session highs against most of the major currencies as we go to print. Emerging market currencies are more mixed. Central European currencies and the Philippine peso are modestly lower, while the South African rand and Mexican peso join the Thai baht and Malaysian ringgit to advance. Gold is recovering from yesterday's slide to about $2017, the lowest level since December 18. It is approaching $2040. 

European benchmark 10-year bond yields are jumping 4-6 bp today, while the 10-year Treasury is up almost one basis point to 4.04%. Asia Pacific equities were mostly higher, including mainland China. However, Chinese shares that trading in Hong Kong, and the Hang Seng itself, South Korea, and Taiwanese shares extended their recent declines. Europe's Stoxx 600 is giving back about a third of yesterday's nearly 0.4% advance, while US index futures are paring yesterday's gains too. February WTI was tagged for 4.1% yesterday, its biggest loss since the middle of last November. It has recouped almost half of the loss today and is back above $72.

Asia Pacific

The continued moderation of Tokyo's CPI bodes well for the national trend and suggest that the pressure on the BOJ to jettison the negative overnight interest rate target has slackened. Tokyo's CPI peaked at 4.4% in January 2023 and finished the year at 2.4%, the lowest since mid-22. The core rate, which excludes fresh food, is at 2.1%, after peaking at 4.3% at the start of last year. The measure that excludes fresh food and energy slipped to 3.5% from 3.6% in November. It peaked at 4% July and August. The national figures are due on January 19, but the Tokyo measure is a good proxy. 

The BOJ meeting concludes on January 23. There had been a small minority of participants who thought a hike was possible then, but after the earthquake, many appear to have joined the majority expect a move in late April. BOJ officials are not convinced yet that demand is strong enough to sustain the increase in price pressures. Wages have not kept pace with inflation and household consumption remains weak. Household spending fell 2.9% year-over-year in November (2.3% expected). In November 2022, they had fallen by 1.2% year-over-year. Household consumption posted one year-over-year gain (last February 1.6%) since October 2022. Labor cash earnings rose 1.5% year-over-year in October and are expected to have remained there in November. Adjusted for inflation, real cash earnings were 2.3% lower year-over-year in October and are expected to be 2% lower than last November with tomorrow's report.

Australia's retail sales bounced back in November (2.0% vs 1.2% median forecast in Bloomberg's survey) after slipping by 0.4% (initially -0.2%) in October. It is the strongest increase since 2021 but may not herald a recovery. In the first 11 months of the 2023, Australian retail sales rose by an average of 0.5%. In the same period in 2022, retail sales rose by an average of 1%. Retail sales were flattered by rising prices. The Australian economy grew by almost 1% in H1 23 but slowed to 0.2% in Q3 and is expected to have matched that in Q4. 

The dollar briefly traded below the pre-weekend low (~JPY143.80) against the Japanese yen in the North American afternoon, reaching almost JPY143.65. and slipped further in early Asia Pacific turnover, reaching nearly JPY143.40. It recovered to JPY144.30 before stalling. Support is seen in the JPY142.10-40 area. The Australian dollar recorded an inside session yesterday but closed firmly. Still, it was the fourth consecutive session of lower highs. Yesterday's high was about $0.6735. and that is where is stalled today. Yesterday's low was slightly below $0.6680 and so far, today's low is about $0.6695. The consolidative phase continues. The greenback also recorded an inside day against the Chinese yuan yesterday and again today. It too is consolidating. The key remains the pre-weekend range (~CNY7.1390-CNY7.1710). The PBOC set the dollar's reference rate at CNY7.1010 (CNY7.1006 yesterday). The average projection in Bloomberg's survey was for CNY7.1490 (CNY7.1498 yesterday).


"Immaculate deflation" that has become the market's shorthand for talking about the rise in interest rates and the easing of price pressures without a much impact on unemployment. However, this is not another expression of "American exceptionalism."  Eurozone unemployment was 7.5% before Covid struck. It peaked at 8.6% in August/September 2020. It bounced around 6.5%-6.6% most of 2023. The unemployment rate has been at 6.5% since last August and recorded a new low of 6.4% in December. Separately, German reported disappointing 0.7% drop in industrial output in November. The median forecast in Bloomberg's survey was for a 0.3% increase. Germany's industrial output has not risen since last April. The aggregate report for the eurozone is due next week (January 15). Lastly, the France reported a narrower trade deficit in November (~5.9 bln euros vs 8.5 bln euros in October). However, the takeaway is that the French trade deficit is narrower in 2023. Through November, the French trade deficit in 2023 was almost 96 bln euros. The shortfall in 2022 was slightly more than 164 bln euros, which was nearly twice the 2021 deficit. France's trade deficit in 2019, before the pandemic was almost 58 bln euros. 

The euro traded in about a quarter-cent range around $1.0950. The market lacks near-term conviction, and the consolidative phase is continuing. A move above $1.10, last Friday's high, could be seen as a breakout and spur a quick move higher. On the downside, last Friday's low was slightly below $1.0880, and yesterday's low was near $1.0925. Sterling was confined to the upper end of last Friday's range but settled at its highest level (~$1.2255) since December 27. More formidable resistance is seen around $1.28, which sterling has not closed above since the end of last July. It looks to have found support in the European morning near $1.2720 and looks set to push higher and retest the upper end of its recent range in North America today.


The foreign exchange market used to be sensitive to the monthly US trade figures. But this is not the case anymore. With the advanced goods report, the trade balance has been easier to forecast. Perhaps, in the larger picture, the many participants recognize that importance of capital flows in determining exchange rates. Though there are different ways to measure capital flows, they are much larger than trade flows. The US reports the November trade balance today. The goods balance deteriorated in each of the three months through November, but despite the over-valued dollar and the growth differentials, the nominal goods balance was little changed in the first 11 months of 2023 (~985 bln) from the same period in 2022 (~$971 bln). The US runs a goods deficit but a persistent service surplus. As a consequence, the overall trade deficit is smaller than the goods shortfall. In the first 10 months of 2023, the overall nominal trade deficit was about $655 bln, down from around $816 bln in the Jan-Oct 2022 period.

Canada reports its November merchandise trade balance. It has experienced a sharp deterioration of its trade goods balance this year and it seems reflect both lower prices and weaker foreign demand. In the first ten months of 2022, Canada recorded a goods trade surplus of about C$19.4 bln. In the Jan-Oct 2023 period the surplus disappeared and a small deficit of around C$1.5 bln has been recorded. Canada's exports contracted by 5.1% at an annualized pace in Q3, which saw the Canadian economy contract by a little more than 1% (annualized) the quarter. Canada reports a monthly GDP figure and that last time it increased was in May. The November GDP is due on January 31.

Mexico will report its December CPI today. Like the US report due Thursday, headline CPI may firm slightly, while the core rate continues to ease. The year-over-year headline rate is seen rising to almost 4.6% from slightly above 4.3%. The core rate may slip toward 5.15% from 5.3%, which would be the slowest pace since September 2021. An increase in the headline rate would be the second consecutive gain. Banxico meets next on Feb 8. It will have the January CPI report in hand when it meets. The swaps market has about an 80% chance of a cut discounted over the next three months. 

The US dollar was turned back after poking briefly above CAD1.3400 yesterday, its highest level since December 18. The greenback reversed low and fell to about CAD1.3345, creating a potential shooting star candlestick. Follow-through selling today has been marginal at best (not even $1.3340). A break below CAD1.3300 is needed to boost confidence a high is in place. The risk is for a re-challenge of CAD1.3400. Follow-through buying of the Mexican peso lifted it to level not seen since last August. The dollar fell to almost MXN16.7850. Before the weekend, it traded above MXN17.07. The greenback's low last year was recorded in late July near MXN17.62. A narrow range has dominated so far today (~MXN16.8165-MXN16.8520).

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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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