by Marc Chandler
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Overview: The dollar's surge in the first part of the week has given way to consolidation. The US dollar is sporting a softer profile against most of the G10 currencies. The Dollar Index is threatening to snap a three advance. Sterling is a notable exception following the weakest retail sales report since 2021. Most emerging market currencies, including China, Taiwan, and Mexico are slightly firmer. US President Biden is expected to sign a bill today that avoids a partial government shutdown but only extended the spending authorization until March 1 and March 8.
The equity rally in North America yesterday, which saw the NASDAQ 100 set a new record-high seemed to help bourses in Asia Pacific today, led by a 2.6% jump in Taiwan. China's stocks were the main exception and reports suggest one of the largest brokers curbed short sales by some investors. Europe's Stoxx 600 is posting a small increase after rising by almost 0.6% yesterday. US index futures point to a firm open. The 10-year US Treasury is flat near 4.14%, a 20 bp increase this week. European bond yields are 2-5 bp lower, with the periphery outperforming the core. The US two-year yield is also flattish today and up about 20 bp this week. Gold tested support at $2000 in the middle of the week and is now near $2030. Resistance is seen near the midweek hike around $2035. March WTI has been pushed above $74 to trade at its best level since Monday when it approached the 200-day moving average slightly above $75. Note that the despite the cold spell in much of the US, March natgas has fallen nearly 9.5% Europe's benchmark is off nearly 8.8% this week.
Asia Pacific
Japan's reported its national CPI for December earlier today. The information that it contained was largely anticipated in the Tokyo report out earlier this month. The national year-over-year headline and underlying rates fell about as much as Tokyo signaled. It puts the headline rate at 2.6% (from 2.8%) at the end of last year. The core rate, which the BOJ targets eased to 2.3% (from 2.5%) and the measure that excludes fresh food and energy slipped to 3.7% (from 3.8%). The headline rate peaked at 4.3% last January. The BOJ has maintained negative rates and yield-curve control in the face of what it argued was cost-driven inflation. Last October, the BOJ forecast core CPI to be at 2.8% at the end of the current fiscal year (March 31) and the next fiscal year (March 31, 2025). At next week's meeting, it is likely to reduce these forecasts. Separately, the tertiary industry activity index fell for the third consecutive month, defying expectations for a small increase. It fell by 0.7% last November, after falling a revised 0.2% in October (initially -0.85) and dropping 1.2% in September. The world's third-largest economy contracted by 2.9% at an annualized pace in Q3 but is seen returning to growth in Q4 23, with an expansion of slightly less than 1% as consumer spending and business investment expand for the first time in three quarters.
The yen was sold to a new low following the disappointing tertiary report. The dollar reached JPY148.80, its best level since late November, but has reversed lower and looks poised to test yesterday's low(~JPY147.65). A close below there would weaken the near-term technical outlook, suggesting the consolidative tone remains intact. While South Korean and Taiwanese officials have expressed concern for the speed that their currencies have declined recently, Japanese officials have been noticeably quiet. The BOJ meets next week and expectations for action have been scaled back. However, because the US interest rate adjustment does not appear over, we suspect this is still dollar-bullish consolidation. Despite the poor employment data, the Australian dollar was the best performing G10 currency yesterday, gaining about 0.35% against the US dollar. Follow-through buying today has seen the Aussie approach Wednesday's high near $0.6595. It poked above $0.6600 in the European morning, but the intraday momentum readings are stretched and there are options for about $775 mln in options struck at $0.6600 that expire today. Still, a weekly close above the $0.6610 area could help stabilize the technical tone. Knowing that the yen traded with a slightly firmer bias would suggest the Chinese yuan would likely steady today and that is what has happened. It has largely traded within yesterday's range. The PBOC set the dollar's reference rate at CNY7.1167 (down from CNY7.1174 on Thursday). The average projection in Bloomberg's survey was CNY7.1913 (vs. CNY7.1961). The dollar has been capped this week ahead of CNY7.20.
Europe
The UK consumer went into hibernation at the end of last year. December retail sales plunged by 3.2% in December. The median forecast in Bloomberg's survey anticipated a 0.5% decline. That means that retail sales fell 2.4% on a year-over-year basis. Unlike many other countries, the UK reports retail sales in volume terms not price. Earlier this week, we learned that the labor market is slowing, and price pressures are easing. Talk of recession is picking up, but the swaps market sees less of a chance of a May rate cut. At the end of last week, a cut was fully discounted. Now, there is a little less than a 70% chanced priced. A week ago, the 130 bp of cuts this year was seen and now about 118 bp.
The euro is less than a quarter-cent range below $1.0890 so far today. For the past two sessions, the euro has found support near the 200-day moving average, slightly below $1.0850. The euro peaked yesterday in Asia near $1.0910 and European and North American participants sold into the upticks. Still, Wednesday's low held, and the consolidation phase is continuing. We are inclined to see a downside break, but a close above the downtrend line coming around $1.0925 today and slightly above $1.0910 on Monday would but the near-term bearish outlook at risk. The ECB meets next week, and its position seems clear. A rate cut in Q1 is too soon, and this is likely the message that ECB President Lagarde reiterates. Sterling is uninspiring. It is around the middle of a two-cent range: $1.26-$1.28. Neither bull nor bear can be satisfied. It reached $1.2715 earlier today, a three-day high, before the dismal retail sales report. However, it is holding above yesterday's low near $1.2650. Last Friday, sterling approached the upper end of the range, and in the middle of this week, it frayed the lower end briefly.
America
US existing home sales are not what typically move the capital markets. The decline in mortgage rates may helping stabilize existing home sales. They fell uninterrupted in the five months through last October. Existing home sales edged up by almost 0.8% in November and are expected to have firmed by 0.3% in December according to the median forecast in Bloomberg's survey. The November TIC report on portfolio investment will be reported late in the day. The US experienced a net outflow of portfolio capital in September and October 2023. Through October, foreign investors bought a net of around $490 bln of US paper assets. This is down from $1.36 trillion in the first 10 months of 2022.
Canada and Mexico report November retail sales today. After a 0.7% increase in October, Canadian retail sales are expected to have stagnated in November. Through October, Canada's retail sales have risen by an average of 0.2% a month in 2023 after an average increase of 0.6% a month in the Jan-Oct period in 2022. Mexican retail sales have performed similarly. This year's average gain through October was 0.2% compared with an average of 0.7% in the same period in 2022. Mexico's retail sales fell each month in Q3 nearly recouped it all with a 0.8% gain in October. The median forecast in Bloomberg's survey is for a 0.6% increase in November.
Since the start of the year through the middle of this week, the US dollar rose by about 2.25% against the Canadian dollar to CAD1.3540. This overshot the (38.2%) retracement of the decline from last November's high, but the greenback has not closed above it (~CAD1.3510). The greenback is trading below the shelf near CAD1.3480 had been formed in recent days and traded to a three-day low slightly below $1.3465. Nearby support is seen around CAD1.3420-40. and a close below it, would likely coincide with a risk-on (higher stocks) could suggest a larger US dollar pullback ahead of the Bank of Canada meeting in the middle of next week. The Canadian dollar's roughly 0.5% loss this week puts makes it the best G10 performer this week. We note that the Canadian dollar often outperforms on the crosses in a firm USD environment. The greenback peaked near MXN17.3860 on Wednesday before reversing lower. Follow-through selling yesterday took it to nearly MXN17.1530 and to about MXN17.1360 today. The price action reflects robust peso demand into pullbacks, and the carry may offer a place for momentum traders to sit out a consolidative phase. Still, the peso's is off 1.6% this week, making it the weakest in the region. Note that the best Latam currency this week coming into today was the Colombian peso (~-0.15%) but may be vulnerable following the cut in the outlook to negative by S&P, citing poor growth prospects. S&P maintained Colombia's BB+, one step below investment grade.
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