by Marc Chandler
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Overview: The sharp dollar advance is stabilizing after follow-through gains earlier today. A larger than expected rise in the UK's December CPI helped sterling recover from the push below $1.26, the lower end of a one-month trading range. It is the only G10 currency that is firmer against the dollar ahead of the North American session. ECB's Lagarde pushed back against the early rate cut speculation and this may have stemmed the euro's losses. The greenback approached JPY148 and remains near there now. Taiwan, South Korea, and Mexico lead emerging market currencies lower.
Equity market losses are accelerating. In the sea of red in the Asia Pacific region, HK stood out was a 3.7% drop and the CSI 300 was off 2.2%. Europe's Stoxx 600 is lower for the third consecutive session, and its 1.2% loss is more than the previous two sessions combined. US index futures point to continued pressure on US equities today. European benchmark 10-year rates are mostly 1-4 bp higher, thought the Gilt yield has jumped nine basis points. The 10-year US Treasury yield is hovering 4.05%, little changed on the day. Gold is near $2033, the middle of today's range. February WTI, which peaked on Monday near $75 fell to almost $70.60 today, a five-day low.
Asia Pacific
Many observers and much of the financial press emphasizes China's economic weakness. For more than two decades, long before the property bubble was pricked, American and British economists have warned that the Chinese system is collapsing. Far from contracting, the Chinese economy grew by 1.0% quarter-over-quarter in Q4 for a 5.2% year-over-year pace. Growth in Q3 was revised to 1.5% quarter-over-quarter from 1.3%. Many G10 countries will not grow in a year what China did in Q4. The details of China's growth in December also seem to defy the conventional narrative. For example, western economists and the multilateral lenders claim China over invests and under consumes. Yet, China's data today showed non-rural fixed asset investment rose by 3% last year, while retail sales grew at more than twice the pace (7.2%). Consumption per capita has more than doubled in the past decade.
The auto sector has received much attention as China becomes the world's largest exporter. Almost 22 mln autos were sold in China last year and a little over 4 mln were exported. Yet, China is being used as an export platform and many of the auto exports are not Chinese brands. In addition, China's vehicle exports last year surged to Russia as European and Japanese brands pulled back. The steady drum of criticism of China distracts from the truly disruptive action, such as the land grab in Nepal and Bhutan, and the audacious efforts of intimidating the Philippines, with whom the US has a defense treaty. Much of the trade arguments and US tactics, including export controls on high-tech, were used against Japan (and Europe previously). However, companies from those areas were encouraged to substitute exports to the US for direct investment in the US while Chinese companies are being deterred.
The dollar surged by slightly more than 1% against the Japanese yen yesterday, the biggest single-day advance since the end of last October. It reached nearly JPY147.30 yesterday and almost JPY148 today. It finished last year slightly above JPY141. The next technical area is closer to JPY148.50. Still, the move has been rapid. The greenback closed above its upper Bollinger Band yesterday, though is coming back within it (~JPY147.65) in the European morning. Initial support is now seen around JPY147.25. The Australian dollar was tumbled about 1.2% yesterday, its largest fall since the middle of last October. Follow-through selling today has extended the Aussie's decline for the fifth consecutive session to test the $0.6530 area. It fell yesterday below the 200-day moving average (~$0.6585) for the first time since mid-December. Support is seen near $0.6500. A break of it targets the $0.6500 area. The Australian dollar is below the lower Bollinger Band (~$0.6580) and that area may offer intraday resistance. The dollar edged up to almost CNY7.20 today, its highest level since late November. The PBOC set the dollar's reference rate at CNY7.1168, slightly higher than yesterday. The reference rate was CNY7.1050 at the end of last week. The market anticipated a faster pace of yuan depreciation. Today's average in Bloomberg's survey was CNY7.1953. It was at CNY7.1696 at the end of last week. Chinese officials are moderating the pace of the yuan's decline, not fully resisting it.
Europe
The UK reported stronger than expected December CPI edged. The 0.4% increase was twice what was expected, and the year-over-year rate is 4.0%, up from 3.9% in November. The monthly gain follows a 0.2% decline in November and a flat October reading. That means that at an annualized rate, UK CPI was 0.8% in Q4 after a 1.6% annualized pace in Q3. The year-over-year pace may tick up in January when January 2023's 0.4% decline drops out of the 12-month measure, but the underlying signal is for UK inflation to fall sharply in H1 24. In the February-May 2023 period, UK CPI rose at an annualized rate of a stunning 11.4%.
Making some conservative assumptions, UK headline CPI could fall toward 2% by mid-year. The UK's core CPI peaked last May at 7.1% and has steadily fallen, reaching 5.1% in November and was unchanged last month. Producer price pressures are subdued. Input prices have been falling year-over-year since last June and output prices had fallen year-over-year in four of the five months through November. In December, input prices were off 2.8% year-over-year and output prices were up 0.1% year-over-year. The market's confidence of the first BOE rate cut in May softened today to about 67% from 88% yesterday and 100% at the end of last week.
After moving sideways inside the range set on January 5 (US jobs day), the euro broke down yesterday to approached $1.0860. Follow-through selling today has been limited to almost $1.0855, perhaps helped by comments by ECB President Lagarde pushing back against speculation of a rate cut before the summer. The euro frayed the lower Bollinger Band (~$1.0870) but did not settle below it. The lower Bollinger Band is a little above the 200-day moving average today (~$1.0850). The euro may have carved a potential head and shoulders topping pattern. The neckline is a little below $1.0870, which was nicked on an intraday basis. The measuring objective is near $1.06. Given the momentum indicators, this seems somewhat deeper than we anticipate. Instead, on a convincing break of the $1.0850 area, we envision a move toward $1.0765 and possibly $1.0725. Sterling came off yesterday but held above the lower end of its one-month range at $1.26, which it nicked today before recovering after the CPI. It rebounded smartly but stalled in front of $1.27. We suspect it will come back off in the North American session. The euro has broken down against sterling to a new low for the year (~GBP0.8570). The four-month low set in December was near GBP0.8550.
America
Today's US economic data, retail sales and industrial production, and tomorrow's housing starts, are the last important inputs ahead of the January 25 initial estimate of Q4 GDP. After today's reports, the Atlanta Fed's GDP tracker will be updated from 2.2% on January 10. The median forecast in Bloomberg's survey calls for 0.4% increase December retail sales (0.3% in November). The headline was likely boosted by auto sales. Core retail sales, excluding autos, gasoline, food services, and build material, rose by an average of 0.5% a month in Q2 23 and Q3 23. The median forecast in Bloomberg's survey is for a 0.2% increase in December, which would put the average at 0.2%, confirming the slowdown in consumption. The GDP measure on consumption rose by 3.1% at an annualized rate in Q3 and is seen slowing to about 2.0% in Q4. The pace is expected to be halved here in Q1 24. Turning to industrial production, output is expected to have slipped by 0.1% in December (+0.2% in November). It would be the second decline in Q4 23. Manufacturing output itself may be flat after rising by 0.3% in November. Late in the session, the Fed's Beige Book for the January 30-31 FOMC meeting will be released. We look for it to be consistent with a further moderation of economic activity and some easing of labor market conditions.
Canada's December CPI reported yesterday saw a 0.3% decline on the month. But owing to the base effect, the year-over-year rate ticked up to 3.4% from 3.1% in November. The underlying core rates firmed slightly. However, the underlying signal is that price pressures are easing and will likely fall sharply in the first part of this year. Canada's headline CPI rose by an average of 0.4% a month in H1 23. In H2 23, it rose by an average of 0.1%. If Canada CPI averages a 0.2% gain a month in H1 24, the year-over-year rate will be near 2% by mid-year. Today, Canada reports its November portfolio flows. Through October, the foreign appetite for Canada's paper assets was halved from a year ago. Specifically, in the first ten months of this 2023, foreigners bought a net C$5.2 bln of Canada's bonds and stocks compared with C$10.4 bln in the same period in 2022. Moreover, foreign investors were net sellers of near C$31 bln in September and October combined. This appears to be the largest two-month divestment on record.
Although the market lowered the chances marginally of a Bank of Canada rate cut in April, it still is the odds-on favorite timing. The implied odds of about 75% is the lowest since last November. Still, the Canadian dollar drew little comfort, and the greenback spent the North American afternoon in a narrow range near CAD1.3500. The US dollar closed above its upper Bollinger Band (~CAD1.3490) for the first time in three months. Follow-through buying today lifted the greenback to about CAD1.3530, just ahead of the next technical target may (CAD1.3540). A US dollar top may still not be in place. The Mexican peso was tagged for nearly 2% yesterday, the most among emerging market currencies. The dollar is up by slightly more than 0.50% in the European morning. It reached around MXN17.37. The 200-day moving average is near MXN17.38. The lurch lower by the peso seemed to reflect a combination of market positioning and the greenback's broad rally. The dollar settled above its upper Bollinger Band (~MXN17.1620). There seem to be little standing in the way of a test on last month's highs in the MXN17.56 area. The Brazilian real lost about 1.3% yesterday. The dollar closed above its 200-day moving average (~BRL4.93) for the first time in a month. Last month's high was near BRL4.98 and that would be the next target, though the BRL5.00 may be more important.
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