by Marc Chandler
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Overview: The dollar is trading with a slightly heavier bias as some of its recent gains are pared. Sterling has moved back into the $1.26-$1.28 trading range that dominated since the middle of last December until the start of this week. The euro is also trading a little firmer despite another large drop in German industrial output (-1.6%). The Japanese yen, Swiss franc, and Norwegian krone are the notable exceptions with a softer profile. Emerging market currencies are mostly firmer. Yet, the lower yielding currencies G10 currencies are trading softer, among emerging market currencies today, the high yielding ones are trading lower. These include the Turkish lira, South African rand, and the Hungarian forint.
Asia Pacific equities mostly advanced, led by South Korea's Kospi, which itself was powered by Samsung. China's Shanghai and Shenzhen composites rose by nearly 1.5% and the MSCI Asia Pacific Index rose to a new five-week high. Europe's Stoxx 600 is slightly lower after advancing 0.6% yesterday. It is hovering near its best level in two-years. US index futures are narrowly mixed. Benchmark 10-year yields are mostly 1-2 bp higher in Europe, though the 10-year Gilt yield is up five basis points, perhaps reflecting a soft reception to the three-year auction after demand yesterday at the 30-year sale was the most in four-years. The 10-year US Treasury yields is up a couple of basis points to 4.12%. It settled last week near 4.02%. Gold is trading quietly, and it remains in the range set Monday (~$2015-$2042). March WTI is edging higher today and reached a three-day high near $74. The two-and-a-half week low was set on Monday around $71.40.
Asia Pacific
There are two main talking points in what is a quiet day for high-frequency economic data in the region. The first is what appears to be a new economic divergence favoring the US. This has encouraged the market to push out the first Fed cut and to reduce the likely amount of easing this year. The rise in US Treasury yields appeared to drag up European rates as well. The second issue is Beijing's efforts to stabilize the stock market are the recent rout. There is not much of a doubt that China, like other large countries, has ample resources to support the currency and equity market. Consider how much ink has been spilled on the so-called Fed's put. In Politics and Markets, political scientist, Charles Lindblom compared the coordination of market with thumbs and political coordination with fingers. China appears clumsier and cruder, and the different institutional settings allow for different policy options. The Federal Reserve does not buy equities but the Bank of Japan, according to Bloomberg, has acquired around 80% of Japan's equity ETFs, which account for around 7% of the country's roughly $6 trillion stock market. The BOJ reportedly in the top-10 shareholders in about 90% of the Nikkei 225.
Tomorrow, China reports January CPI and PPI. Deflationary forces likely remain intact. China's consumer prices have been dragged down by food prices, which does not seem like a demand issue. Non-food prices have risen slightly over the past year. Producer prices falling (below zero) since October 2022. The bottom was reached last June at -5.4% year-over-year. PPI was -2.7% in December and likely remained in the -2.5% to -3.0% range seen over the past five months. India's central bank also meets tomorrow. Steady policy is expected. The central bank last lifted the repo rate in February by 25 to 6.50%. It bottomed 4% this cycle. India's December CPI was near 5.7% and the January figure is due next week. A rate cut around the middle of the year appears priced into the swap market. Amid strong foreign demand, India's 10-year bond yield has fallen by almost 10 bp this year to around 7.08%. Strong foreign interest in Indian equities has also been reported, though the leading indices are little changed. On the other hand, the rupee is the only emerging market currency that has managed to eke out a gain against the dollar, albeit minor (~0.30%).
The biggest drop in the US 10-year yield since last week's FOMC meeting (~7 bp) dragged the dollar lower against the yen yesterday. The greenback was turned down from around JPY148.80 and fell to almost JPY147.80 in the North American afternoon. It nearly met the (38.2%) retracement of the rally from last week's low (~JPY145.90) at JPY147.75. The low since the initial reaction to the US jobs data was near JPY147.70 was tested today. If the dollar has put in a near-term peak, we suspect it should hold below the JPY148.40 area. The Australian dollar briefly traded fractionally above Monday's high, which also corresponds to the (38.2%) retracement of the sell-off since the US employment data. The $0.6525 area is also the neckline of the large head and shoulders bearish technical pattern. In such a pattern it is not unusual to break the neckline and come back to test it. The next retracement (50%) level is near $0.6540, which the Aussie tested today before coming off. The dollar slipped to a three-day low against the Chinese yuan. After being turned back from near CNY7.20 on Monday, the greenback fell about CNY7.1825 earlier today before recovering to CNY7.1950. The PBOC set the dollar's reference rate at CNY7.1049 (CNY7.1082 yesterday). The average in the Bloomberg survey was for CNY7.1858 (CNY7.2025 yesterday).
Europe
Germany's 8.9% surge in factory orders in December, the largest since the jump in May-June 2020, failed lift industrial output, which has been not risen since last April on a monthly basis. The 1.6% drop was three-times larger than expected, and overall output is at its lowest since June 2020. The drop in December was led by chemicals and construction. Last week, France reported a 1.1% jump in its December industrial production led by a 1.2% rise in manufacturing output, the largest increase since February 2023. Recall that France's December manufacturing PMI fell to 42.1, a new cyclical low from 42.9 in November 2023. Spain reported a 0.1% decline in its December industrial production after a 1.0% jump in November. Italy will report is numbers on Friday and the median forecast in Bloomberg's survey calls for a 0.9% increase after a 1.5% fall in November. The aggregate estimate for the eurozone is due on February 14, at the same time as revised and details for Q4 23 GDP are due. The preliminary estimate was unchanged.
France reported its December trade figures today. The shortfall was 6.8 bln euros. The average monthly deficit in 2023 was about 8.4 bln euros. In 2022, the average monthly deficit was about 13.5 bln euros. Before Covid, in 2019, the average monthly trade deficit was 4.8 bln euros. Germany reported a 22.2 bln euro trade surplus in December earlier this week. It was the largest monthly surplus since November 2017. The average monthly German surplus in 2023 was 17.5 bln euros after 7.1 bln average in 2022. In 2019, Germany's average monthly trade surplus was almost 19 bln euros.
The euro was confined yesterday to less than half-of-a-cent range above Monday's low for the year slightly below $1.0725. In Europe and North America, the euro was unable to take out the high set in the Asia Pacific session on Tuesday slightly above $1.0760. Again, traders in the Asia Pacific region bought the euro and it reached almost $1.0775. The $1.0790-$1.0810 area may offer formidable near-term resistance., but the euro's upticks look tenuous. Initial support is seen around $1.0740-50. Sterling broke out of the $1.26-$1.28 trading range on Monday and fell to about $1.2520. Sterling re-entered its previous range yesterday but settled slightly below it. Follow-through buying has lifted to around $1.2635 today in the European morning. Stronger resistance is likely in the $1.2645-75 area, but intraday momentum indicators are stretched.
America
The US and Canada report December trade figures today. In an earlier era, the US trade balance was the key monthly report. However, economists appear to have gotten better at forecasting it, and an advanced estimate of the merchandise balance is also published. The trade balance hardly causes a ripple these days. In calculating Q4 GDP, an assumption was made for the December trade balance, which is likely a recent average as a place holder. The shortfall averaged about $65.3 bln a month through November and $62.9 bln in the last three months of data. In 2022, the average monthly deficit was almost $71.2 bln. In 2019, before Covid, the average monthly deficit was $41.6 bln. To be sure, these are nominal numbers, reflecting both quantities and prices. The broader measure, the current account deficit was 2.1% of GDP in 2019 and likely a little above 3.0% of GDP last year.
In 2022, Canada reported a monthly merchandise trade surplus of C$1.6 bln. In 2019, before Covid, the average monthly deficit was nearly as big as the surplus. Last year's trade surplus has also but disappeared. The average monthly goods surplus through November was about C$400 mln. Canada's current account deficit may have widened slightly last year to around 1% of GDP from about 0.4% in 2022 Canada's trade figures, like the US's, typically hardly moves the market. Canada reports January jobs data on Friday. The market may be more sensitive to it than the December's trade balance. Recall that Canada lost 23.5k full-time position in December, the most since May 2023. This probably overstates the weakness in the Canadian labor market and a recovery seems likely in January.
The US dollar held to the tick, according to Bloomberg, Monday's high against the Canadian dollar slightly below CAD1.3545. The greenback trended low in Europe and North America yesterday to reach almost CAD1.3475 and made a marginal new low toward near CAD1.3470. That houses the 200-day moving average and the (38.2%) retracement objective of the rally from last Friday's low (~CAD1.3435). The US dollar is trading between two set of options that expire today. The first is at CAD1.35 for about $975 mln and the other is for about $557 mln at CAD1.3465. The greenback continued to retreat yesterday from Monday's high around MXN17.28. But the bears hesitated yesterday and today as MXN17.00 neared. This is the lowest dollar level in three weeks. The big events of the week are tomorrow: January CPI (headline rate is seen rising while the core rate falls) and the central bank meeting. A rate cut is coming, but not quite yet, is the general consensus.
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