China Returns, the US is on Holiday, and the Dollar Consolidates snbchf.com

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Marc Chandler
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China Returns, the US is on Holiday, and the Dollar Consolidates

Overview: US markets are closed for President's Day, while China's markets re-opened from the long Lunar New Year holiday. Mainland stocks advanced, while the yuan slipped slightly. The US dollar is mostly softer but in narrow ranges. The Antipodeans and yen lead, while the Swiss franc the only G10 currency that is slightly softer. Most emerging market currencies are lower, led by about a 0.5% loss of the South African rand. The Mexican peso's and South Korean won's small gains are the exceptions.

Stocks in the Asia Pacific region were generally higher, led by China, but foreign inflows lifted South Korea's Kospi by 1.2%. Japan's markets were mixed. Europe's Stoxx 600 is treading water. It advanced 1.4% last week, its fourth consecutive weekly gain. US index futures are slightly firmer with no cash market today. There is much anticipation of Nvidia's earnings in the middle of the week. European 10-year yields are mostly 1-2 bp lower today. Gold set recorded the low for the year last Wednesday near $1984 and is rising for its third consecutive session today. It traded to $2023, just ahead of resistance in the $2024-$2025 area. April WTI settled before the weekend near $78.45, its highest close since early last November. It is consolidating today in a roughly $77.65-$78.35 range.

Asia Pacific

China returned from the Lunar New Year holiday. Optimism of a recovery in consumption helped mainland stocks trade higher. Mainland shares that trade in Hong Kong rallied 4.75% last week. It was the first back-to-back gain since last November. However, today the CSI 300 rose almost 1.2%, while the Chinese shares that trade in HK fell by 1.3%. The PBOC kept the one-year Medium-Term Lending rate steady (2.5%), and Chinese banks will likely do the same with the loan prime rates tomorrow, though there is a small chance that they pass through more of last August's PBOC rate cut.

The contraction of the Japanese economy in Q4 23 surprised nearly all economists. Consumption and business investment fell for the third consecutive quarter. This is the longest streak since Q2 08-Q1 09. Capex fell for four quarters, from Q2 12 through Q1 13. These are the two sectors that need to be monitored closely to see the economy is contracting for a third quarter. The preliminary January machine tool orders are worrisome. Domestic orders collapsed by 20% on the month, and foreign orders were off nearly half as much.

The dollar approached JPY152 in 2022 and again in 2023. There seems little to prevent another test. Last week, MOF officials issued their first warning of the year about the exchange rate, but the dollar finished higher the seventh consecutive week. Although intervention could happen outside of Japanese hours, there is a bit more a diplomatic hurdle. We suspect while by various measures the yen is extremely undervalued (OECD's model of purchasing power parity puts at more than 50% below fair value), material invention would not receive a sympathetic hearing by the US Treasury. Moreover, a claim of undesirable volatility also rings hollow. Three-month implied vol fell to 8.7% the end of last week, a new low since early last December. The greenback is trading quietly, albeit with a softer bias today. Initial support has been found slightly below JPY149.90 and additional support is seen in the JPY149.50-60 area. The Australian dollar rose four sessions last week, the most in three-months, though the magnitude of last week's gain was minor, around 0.10%. It finished last week on a week firm note, setting a new five-day high ahead of the weekend. But it settled slightly below the 20-day moving average (~$0.6540). This area corresponds to the (61.8%) retracement of the Aussie's sell-off since the US jobs data on February 2. It set a high near $0.6610 before the data, and today, briefly traded above $0.6550, its best level since then. A close now below $0.6525-30 would be disappointing. Before the holiday, the US dollar settled at about CNY7.1935. It held above there today and reached around CNY7.198.5 It has not traded above CNY7.20 in three months. The PBOC set the dollar's reference rate at CNY7.1032 (CNY7.1063 before the holiday). The average forecast in Bloomberg's survey was CNY7.1946 (CNY7.1919 previously). The dollar slipped against the offshore yuan for the fourth consecutive session. It has not traded below CNH7.20 since February 7.

Europe

At the end of last month, the swaps markets had an ECB cut fully discounted for an April and 160 bp of cuts all year. Now it has about a 45% chance of an April cut and almost 107 bp of cut this year. At the end of January, the swaps market had the first rate BOE rate cut fully priced in June and almost a 50% chance of a second. Now, the market sees the chance of a June hike as also an even money proposition. Since the end of last year, the extent of BOE rate cuts this year has reduced to 68 bp from 113 bp at the end of January. Despite these developments, the euro is off about 0.4% this month and sterling has lost around 0.6%.

Last week, the EC lowered its forecast for eurozone growth this year to 0.8% from 1.2% previously. It also shaved 2025 growth to 1.5% from 1.6%. Inflation previously was projected to fall to 3.2% this year, but now is seen near 2.7%, which incidentally is same as the ECB's December projection. The EC's 2025 inflation forecast for the eurozone is 2.25, while the ECB's is 2.1%. Earlier today, France's Finance Minister Le Maire cut the forecast for French growth this year to 1% from 1.4%. To maintain the budget deficit target, he also announced 10 bln euro in new spending cuts.

The euro has a three-week rally in tow to start this week. In fact, it has risen in seven of the last nine sessions. It posted its highest close of last week before the weekend. Still, it has failed to close higher on a weekly basis since the second week of the new year, and even then, it rose by less than 0.1%. We think the euro is forging a low and a close above $1.08 would be constructive. We have identified a band of resistance ($1.0810-30) and above there, a push above $1.0865 boost confidence that a low in in place. It is in less than a fifth of a cent range today below $1.0790. Sterling settled on a firm note ahead of the week, slightly above $1.2600. The low was set after the soft CPI last Wednesday (~$1.2535), but sterling shrugged off the disappointing GDP the following day and closed higher on Thursday and Friday. Initial resistance is seen in the $1.2635-50 area. Sterling has not closed above that band since the US employment report on February 2. It has held above $1.2600 so far today, but met sellers near $1.2630, a four-day high.

America

A key issue is whether the firmer than expected CPI and PPI changed the Fed's outlook. We do not think so for four reasons. First, the decision in March, May or June will not be determined by January CPI. Second, the bar to boost the Fed's confidence was set low by Fed Chair Powell who said good data was sought, not necessarily better data. Third, the price dynamics suggest the PCE deflator will be more subdued. Fourth, the fall in retail sales and industrial output warn that the real sector weakness at the start of the year. Several Fed officials speak this week, and most will address the economic outlook.

While monetary policy has been very much focus, fiscal policy comes back to the fore. Specifically, the last continuing resolution for authorizing federal government spending expires March 1 and March 8. Many Republicans are opposed to another short-term resolution. However, time is of the essence. The House of Representatives went on recess last week and do not return until February 28. The Senate is taking off this week, and when it returns, the first order of business will be to hear the impeachment case against Homeland Security Secretary Mayorkas (impeached by the House of Representatives by a 215-214 vote).

After pulling back from the CPI-inspired rally to CAD1.3585 high 2024 high, the US dollar found support before the weekend near CAD1.3460. It settled near CAD1.3485. It has held below CAD1.3500 today and has been in a narrow range mostly below CAD1.3490 and above CAD1.3470. Nearby resistance is around CAD1.3520 and then in the CAD1.3540 area. Canada reports January CPI tomorrow, and with the holiday in the US today, there is even more reason to look for a consolidative session. The greenback recorded last week's low ahead of the weekend slightly below MXN17.03. It is holding barely above there today, while staying below MXN17.07 in quiet turnover. On February 5-6, the US established a range of slightly below MXN17.01 and about MXN17.28. It continues to work the range. In the week through last Tuesday, February 13, speculators in the futures market boosted their net long peso position by 13k contracts, the most since the end of last November, to almost 100.5k contracts (500k pesos per contract, or ~$29.3k), which is the largest since mid-March 2020. Since the end of last October, the bulls have been amassing a large gross long peso position, with the exception of two reporting week. The bears had been extending their gross short position too. And for the fourth time since the end of last October, the bears covered last week. The 10k contracts covered was the most since last June and represents almost an 18% reduction of the gross short position, the most in absolute and proportional terms since last June.

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About 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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