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Oil Retraces Initial Surge, Euro Slips to Marginal New Low, while Sterling Hugs $1.27

Oil Retraces Initial Surge, Euro Slips to Marginal New Low, while Sterling Hugs $1.27

Overview: Key developments today include the Hong Kong court ordered liquidation of China's Evergrande and the reversal of oil prices after a sharp rally initially in Asia after separate attack in the Middle East that killed US troops in Jordan and struck a Russian oil tank in the Red Sea. March WTI, which settled near $78 ahead of the weekend, its best level since the end of last November, rallied to about $79.30 before returning to almost $77.50 and is now a little above $78. China's CSI 300 rallied about 2% last week on the back of the cut in reserve requirements and other efforts to support the equity market. It gave back nearly half of last week's gains today, even though the other large regional markets rose. Europe's Stoxx 600 is in a narrow range near the pre-weekend high, which was the best level since in nearly two years. US equities indices are narrowly mixed. Separately, before the weekend, the Biden administration announced a halt in new liquified natural gas exports. It does not impact current flats but could delay or derail large new projects. Post-Russia's invasion of Ukraine, the US provides about half of Europe's LNG shipments. Europe's benchmark has fallen for the past three weeks but is up 1% today. 

Most European currencies are weaker, and the euro made a marginal new low for the year. The dollar bloc and yen, and Swiss franc trading with a firmer bias. Emerging market currencies are mostly lower, though a handful of Asian currencies are posting minor gains. The Hungarian forint is the weakest, losing almost 1%. The EU is threatening retaliatory action if Prime Minister Orban continues to insist on blocking large aid to Ukraine. At the same time, Hungary central bank meets tomorrow and 100 bp cut is possible. The government want to shift the target rate to bills, which are lower than the deposit rate and the central bank is resisting. European bonds are rallying, driving down yields by 5-7 bp today, while the 10-year US Treasury yield is off four basis points to slip through 4.10%.

Asia Pacific

There seem to be two economic issues the market is grappling with in the Asia Pacific's two largest economies. First, the market is convinced that the BOJ jettison its negative policy rate in Q2. The issue is whether Japanese investors repatriate funds invested offshore, with implications for interest and exchange rates. Recall that in 2022, Japanese investors were net sellers of international bonds at a weekly average rate of about JPY418 bln (~$3.2 bln). Despite tweaks to the Yield-Curve Control policy, which, in two steps lifted the upper end of the 10-year yield to 1.0%, Japanese investors returned to the international bond markets, buying an average of JPY376 bln a week (~$2.7 bln). As of November, the US Treasury estimates that Japanese hold $1.127 trillion in US government bonds, up about $52 bln. In 2022, the dollar-value of Japanese Treasury holdings fell by about $125. 

The second economic issue being debated is about trajectory of the Chinese economy. Long before the property bubble was purposely pricked and well before Xi's abandonment of the previous path that China was on, and the increased presence of his faction within the Chinese Communist Party, well respected economists were claiming that the economy hit a "Chinese Wall."  The Chinese economy has floundered since Covid, and Beijing now appears to recognize new action is necessary to support the economy. This week's release of January PMIs are unlikely to reflect the new initiatives. The cut in required reserves announced last week are not effective until next week. China's CSI 300 posted its first weekly gain of the year last week. Yet, after seeing several false dawns (bottoms), many investors nursing scar tissue, will likely look for more evidence that this time a low is in place. Still, as of today, strategic investors will be barred from lending out shares for short-sales during agreed lock-up periods on the major exchanges. At beginning of Q4 23, limits were imposed on business executives lending out shares received in strategic placements. Moreover, starting mid-March, securities firms that borrow shares from institutional investors will have to wait one day before providing them to brokers (to facilitate short sales. 

The dollar settled last week near JPY148.15, which was slightly above the week's average. Initially, follow-through buying lifted the greenback to almost JPY148.35, stopping ahead of the JPY148.50 level where there are $450 mln in options that expire today. Lower US yields may have helped drag the dollar back to around JPY147.70. If that does not hold, the next support is seen near JPY147.50. That said, the dollar has a four-week rally in tow and the momentum indicators are stretched. In every session last week, the Australian dollar rose above $0.6600 but was greeted with sellers that drove it back down. The last time it managed to settle above $0.6600 was January 15. Still, Aussie found support in the $0.6550-65 area last week. The market has not given up and it is probing the $0.6600 in the European morning. Still, the intraday momentum suggests the pattern will hold and the Aussie will likely come off in the North American session. Like the yen, the Australian dollar has fallen in each of the four weeks to start the year. Plenty of data (retail sales, CPI, trade) ahead of the central bank meeting on February 6. The dollar traded with a slightly firmer bias against the Chinese yuan but was mostly confined to the pre-weekend range (~CNY7.1715-CNY7.1820). Still, it is the third consecutive session that greenback has firmed. The PBOC set the dollar's reference rate at CNY7.1097 (CNY7.1074 on Friday. The average in the Bloomberg survey weas CNY7.1802 (CNY7.1702 Friday).


This is a big week for Europe. Tomorrow is the first official estimate of the eurozone's Q4 23 GDP. ECB President Lagarde warned of stagnation at last week's press conference, but many economists see a 0.1% contraction. That may meet a general definition of stagnation, but it would be the second consecutive quarter of economic contraction, which is a popular definition of a recession. On Thursday, the preliminary January CPI will be announced. The market expects a slightly softer heading rate (2.8% vs. 2.9%) and a steady core rate 3.4%. The Bank of England also meets on Thursday. It will not do anything but Governor Bailey's forward guidance, besides being "data dependent" may help shape expectations. Currently, the swaps market has about a 50% chance of a cut in May and the first reduction is fully discounted in June. We look for a sharp drop in UK CPI in the Feb-May period that could boost the chances of May cut.

The euro slipped to a new low for the year (~$1.0815) ahead of the weekend before recovering and settling higher on the day. In fact, despite the repeated penetration of the 200-day moving average on an intraday basis last week, it failed to close below it (now ~$1.0845) even once. It is trading with a heavier bias today and returned to the pre-weekend low, but the intraday momentum indicators are stretched, suggesting follow-through selling may be limited in North America today. The euro settled last year near $1.1040. It was sold in the first half of January and spent little time below $1.09. Here in the second half of January, the euro has spent little time above $1.09 and not closed above it since January 15. Sterling is hugging the middle of the $1.26-$1.28 range that it has been in since mid-December. The five- and 20-day moving averages have converged slightly above $1.2700. Last week, sterling mostly held above $1.2650 and peaked near $1.2775. Sterling has been confined to a narrow range around $1.27 so far today. 


This is an important week for the US; however, the first part of the week will be quiet. The JOLTS report, the ADP private sector employment estimate, and the Employment Cost Index will all be reported on Wednesday, and the Treasury's quarterly refunding announcement (more supply) a few hours before the FOMC meeting concludes. The Fed will not do anything, leaving a statement that is unlikely to change much. Many expect some discussion of the unwinding of the balance sheet and the timing of tapering. We had previously thought it would happen around mid-year, but now there is more speculation about a May announcement. US January auto sales will be reported on Thursday followed by the national jobs report on Friday. Our concern is that poor weather may have depressed activity and employment. Canada reports November GDP figures on January 31. The monthly GDP print has been flat for the previous three months and has not grown since May. Judging from last week's central bank comments, officials are more focused on the stickiness (persistence) of core inflation.

The same day that the Fed meets, three Latam central banks are expected to cut rates. Colombia's central bank will announce its decision before the Fed, Brazil, and Chile afterwards. Colombia began its easing cycle at the end of last year with a 25 bp cut to 13.00%. The market seems split between another 25 bp cut and a 50 bp move. Brazil's central bank will likely announce it is continuing the easing cycle that began last year with a 50 bp cut in the Selic rate to 11.25%. The swaps market anticipates about 125 bp of cuts here in H1 24. Chile is expected to deliver a 100 bp cut to 7.25%. It began the easing cycle last July from 11.25%. Mexico report Q4 23 GDP. It is expected to have slowed from about 1.1% in Q3 23 to around 0.4% quarter-over-quarter, which would be slowest since the contraction in Q3 21.

 The Canadian dollar has fallen in each of the four weeks to start the year. Its roughly 1.50% decline makes it the second-best G10 performer after sterling (~-0.25%). The greenback has carved a range in the last two weeks between about CAD1.3415 and around CAD1.3540. It is trading quietly today (~CAD1.3430-CAD1.3465). The momentum indicators look to be rolling over. A break of CAD1.3400 could see CAD1.3360 but we are wary of anticipating a breakout ahead this week's big events that could encourage some risk-off to which the Canadian dollar seems particularly sensitive. The US dollar has risen against the Mexican peso for the past two weeks after falling for the previous five. Ahead of the weekend, the dollar posted its lowest settlement of the week (~MXN17.1615). Still, the greenback looks to be consolidating mostly within a MXN17.14-MXN17.25 range. 

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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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