by Marc Chandler
My articles My offerMy siteAbout meMy videosMy books
Follow on:LinkedINTwitterSeeking AlphaAmazon
Overview: We have put emphasis on today's US retail sales report. A recovery from the weather-induced weakness in January should underscore the resilience of US demand after another 200k jobs were created and personal income jumped 1%. While the dollar has traded firmer in the first half of this week, given the 25 bp jump in the US two-year yield, its performance is somewhat disappointing. It is narrowly mixed in the European morning against the G10 currencies. The dollar bloc, sterling- and the Norwegian krone enjoy a slightly firmer bias. The euro, yen, and Swiss franc are nursing minor losses. Most emerging market currencies are softer, but for the second consecutive session, the Hungarian forint is recovering and leading the advancers.
Equity markets are firm, with the notable exception of China and Hong Kong. Most of the other large markets in the Asia Pacific region advanced. Europe's Stoxx 600 is rising for the third consecutive session and is extending its move into record territory. US index futures are also trading with an upside bias. A strong reception to the US Treasury's sale of 30-year bonds yesterday did not prevent the 10-year US yield from edging higher for the third session in a row yesterday. It is slightly firmer today testing 4.20%. It settled last week below 4.08%. European benchmark yields are narrowly mixed today, with the periphery outperforming the core. Gold is consolidating inside yesterday's range, which was inside Tuesday's range (~$2150-$2185). It is beginning to look vulnerable to a downside correction. Oil is extending yesterday's recovery and April WTI is pushing back above $80 a barrel. The recent highs were around $80.65-85. A drone strike on a large Russian refiner yesterday and the first drawdown of US inventories in seven weeks helped support prices. Today, OPEC+ warned that the oil markets may face a supply deficit this year.
Asia Pacific
Most of Japan's spring wage negotiations (shunto) concluded yesterday. Several large companies agreed to the biggest pay increases in more than 30 years. Observers see an average of more than 4% pay increase. Last year's average pay increase was slightly less than 3.6% when small companies are included. Note that small and medium-sized Japanese companies employ around 70% of Japan's workers. Japan's CPI peaked in January 2023 at 4.3% year-over-year. In January 2024, it stood at 2.2%. Tokyo's February CPI warns that the national reading could rise back to 2.8%. The BOJ did not buy equity ETFs earlier this week even though the Topix had tumbled 2% Monday morning, which seemed to have triggered such operations in the past. The Topix was near 34-year highs, which may have deterred the BOJ, but others see it a sign that it is exiting the extraordinary monetary policy. There is some speculation that the BOJ may abandon its effort to cap the 10-year yield at 1.00%. The 10-year yield set the high for the year on Tuesday slightly shy of 0.80%. It peaked last November around 0.97%.
There are two ways foreign demand can be met: Exports and direct investment. Exports are the traditional approach. However, a combination of protectionism and an overvalued dollar spurred US direct investment strategy--build and sell locally. This was also a developmental strategy. It was driven by long-term capital flows (buying and building points of production and distribution) and led to the transfer of technology and employment. For more 60 years, the local sales by majority-owned affiliates of US multinational companies outstrips US exports by magnitudes. Japan's production moved offshore in the 1980s and 1990s were essentially the same reason, and the local sales of affiliates of Japanese companies outstrips Japanese exports. Protectionism, and to some extent, rising labor costs in China are forcing Chinese companies on the same path. The US may balk at direct investment from Chinese companies, but not so in the Global South. Starting in late 2022, Chinese exports to other developing countries surpassed shipments to developed countries and direct investment is also rising.
The dollar spent most of yesterday in a JPY147.50-JPY148.00 range and it remains in that range today. It pulled back from the session high set in early Europe on Tuesday and settled little change. A Bloomberg survey out earlier this week showed a majority expected the BOJ to standpat next week. A strong US retail sales report, and the higher yields that may result, could help lift the dollar further against the yen. Above the cap around JPY148.20, could target the JPY148.70-JPY149.20 area. The Australian dollar held above Tuesday's low (~$0.6585) but could not muster the strength to push above Tuesday's high (~$0.6640). Still, the Aussie posted its highest close (~$0.6625) in two months. It is consolidating inside yesterday's range, which is also inside Tuesday's range (~$0.6585-$0.6640). The price action looks constructive and there is little to deter a run at the high set at the end of last week near $0.6670. The greenback is firm, but little changed against the Chinese yuan. The PBOC set the dollar's reference rate at CNY7.0974 (CNY7.0930 yesterday). The average in the Bloomberg survey was CNY7.1882 (CNY7.1769 yesterday). The dollar has held barely below CNH7.20 against the offshore yuan. It has not closed above it for the past four sessions.
Europe
The eurozone economy was flat in Q1 23, expanded by 0.1% in Q2 and contracted by 0.1% in Q3 before stagnating again in Q4 23. There was some hope of a better 2024, but the dramatic 3.2% plunge in January industrial production reported yesterday suggests a poor start to the year. Moreover, despite the meme of German de-industrialization, the slide in the aggregate industrial output came despite the 1% rise in German output (0.6% expected). French industrial output had been expected to slip by 0.1% but instead fell by 1.1%. In December industrial production rose 0.4% not 1.1% as had initially been reported. Italy has yet to provide its numbers, but Spain's industrial output rose 0.4%, which was slightly more than expected, while the December contraction was 0.6%, twice as much as initially reported. The Netherlands reported its January manufacturing output tumbled 4.7%, giving back a large chunk of the 6.8% gain in December.
The euro traded firmly yesterday after $1.09 held on Tuesday. Session highs were reached near $1.0965 in early afternoon trading in North America. It settled firmly, at its best level in two months. It has taken a great deal of energy to lift the euro from $1.07 in mid-February to $1.0980 at the end of last week. Momentum indicators are getting stretched and the upper Bollinger Band is near $1.0975. It appears many short-term and momentum traders are long euros, and we suspect there is some pressure to square up ahead of next week's FOMC meeting, where the risk is asymmetrical. It is more likely that the Fed signals fewer rather than more rate cuts this year than three the median thought at the FOMC meeting at the end of last year. We had been looking for a euro pullback after last week's US employment report and we are not convinced it is over. Sterling was as quiet as it has been this year, trading in a third-of-a-cent range above $1.2775. It was in less than half of the range seen in the last 4-5 sessions. In the three sessions through Monday, sterling settled above $1.28. While it has remained within striking distance these past two sessions, it has stalled and settled below $1.28. It is straddling $1.28 today, straying less than a fifth-of-a-cent from it. Nearby resistance is seen near Tuesday's high (~$1.2825).
America
The combination of the February employment report and CPI has seen the market pare back wagers of a June Fed cut. On the eve of the jobs report, a June rate cut seemed like a done deal and the Fed funds futures implied 96% chance. The odds have fallen for the past four sessions before steadying today, ahead of the US retail sales report. It is near 75% now. If the Fed does not cut rate in June, the market will likely downgrade the chances of four cuts this year. Recall that the day before the jobs report, the Fed funds futures had discounted three rate cuts and about a 62% chance of a fourth cut. The odds of a fourth cut increased after the jobs data (~80%). Its probability has fallen in the first three sessions of this week to stand at about 22%.
The risk is that adjustment may be extended with today's US data. The most important of which is the February retail sales. February was the third consecutive month of more than a 200k increase in nonfarm payrolls, and recall personal income surged by 1.0% in January, but consumption rose by a milder 0.2%, We know that auto sales improved in February and the average retail price of gasoline rose by 5.75%. A winter storm appears to have depressed January retail sales. A strong recovery, which speaks to demand. Separately, but at the same time, February PPI will be released. The headline rate is expected to accelerate above 1.0% for the first time since last September. The core rate has been trending low since peaking at 9.7% in March 2022. There have been two exceptions, July 2023, and January 2024. It is expected to slip to 1.9% from 2.0% in January. Weekly jobless claims will get little notice given the retail sales and PPI report. Business inventories are typically not the kind of data that moves the markets. Recall that businesses rebuild inventories in Q3, and this added 1.3 percentage points to GDP. In Q4 23, inventories contributed 0.1 percentage points to GDP.
The US dollar probed three-day lows against the Canadian dollar yesterday (~CAD1.3460). This met the (61.8%) retracement of the greenback's rally from last Friday's low (~CAD1.3420) to Tuesday's high (~CAD1.3525). A break of CAD1.3460 would set up a retest on the CAD1.3400-20 support. The Mexican peso's climb has been relentless, it has risen in 11 of the past 13 sessions. It is the strongest currency in the world here in Q1 24, with a 1.7% gain against the dollar. The greenback slipped slightly below MXN16.6600 yesterday as it draws closer to the multiyear low set last July near MXN16.6265. The dollar's downtrend has accelerated. It has not closed above the five-day moving average for the past 12 sessions. It is near MXN16.7520 on a closing basis today.
You Might Also Like
Forex Becalmed with the Greenback Mostly Firmer in Narrow Ranges
2024-03-05
(Business trip will interrupt the commentary over the next few days. Check out the March monthly here. Back with the Week Ahead on March 9. May have some comments on X @marcmakingsense.) Overview: Outside of the Australian and New Zealand
dollars, which are off by 0.20%-0.25%, the other G10 currencies are little
changed and mostly softer in narrow ranges. A firm Tokyo CPI, mostly on base
effects and softer rates helped keep the US dollar below the recent highs
against the Japanese yen. Most emerging market currencies are lower, led by the
Malaysian ringgit. Meanwhile, the Hungarian forint is stabilizing after
extending losses to new record levels against the euro. The new news among US
data today is the ISM services. It is expected to have softened, but
disappointment could weigh on US
Sterling Buoyed by Labor Market Report Ahead of US CPI
2024-02-13
Overview: The US dollar is enjoying a mostly firmer bias ahead
of today’s CPI report. Sterling is the strongest among the G10 currencies after
a more resilient than expected labor market report. The dollar extended its
gains against the Japanese yen to a new high since last November, but the
market seems cautious as it approaches JPY150, where large options expire today.
On the other hand, emerging market currencies are mostly faring better. The
Mexican peso and Polish zloty of notable exceptions and are nursing minor
losses. The Nikkei set new 30-year+ highs and at one point rose 3% today, the most
since November 2022 before settling up nearly 2.9%. It is about 2.5% away from a record
high. Most markets in the Asia Pacific region rose today, though Australia and
New Zealand were
US Tech Sell-Off Challenges Risk Appetites Ahead of the FOMC
2024-01-31
Overview: Ahead of the US Treasury’s quarterly
refunding announcement and the outcome of the FOMC meeting, the dollar is
trading higher against all the G10 currencies. With US high-flying tech stocks
posting steep losses after disappointing earnings reports, the currencies most
sensitive to risk-appetites, the dollar bloc and the Norwegian krone are the
weakest. Emerging market currencies are mixed. The South African rand,
Philippine peso, and Hungarian forint lead the advancers. The Czech koruna,
Taiwanese dollar, and South Korean won are the laggards, off around 0.4%-0.5%. The Nikkei recovered from
initial gap-lower losses and closed about 0.6% higher. However, Hong Kong and
mainland shares tumbled by more than 1%. Taiwan was off 0.8% and South Korea
slipped by less than 0.1%. Europe’s
China Data Dump Keeps Market Looking for a Rate Cut Next Week
2024-01-12
Overview: The mostly consolidative week for the US dollar
continues. Most for the G10 currencies are +/- about 0.25% today and only a
slightly wider range for the week. The odds of a Fed rate cut in March is
virtually unchanged on the week at around 75%. The JP Morgan Emerging Market
Currency Index is practically flat on the day and week. The Russian ruble and
Mexican peso lead today’s advancers, while eastern and central European
currencies are laggards. The Chinese yuan is flat despite moderating deflation
and a larger trade surplus. Lending figures disappointed. The PBOC is likely to
cut its one-year benchmark rate at the start of next week. The US and UK strike on the Houthi in Yemen has helped lift oil and gold
prices, but otherwise the impact on the markets is minimal. Outside of
Soft US CPI Today Paves Way for Fed Pivot Tomorrow
2023-12-12
Overview: The US dollar is trading softer against all the
G10 currencies ahead of what is expected to be a soft November CPI report,
which paves the way for a pivot by the FOMC tomorrow. It is expected to signal
that policy may be sufficiently restrictive and anticipate being able to cut
rates next year more than it thought in September, even if not as much as is
priced into the market. Among emerging market currencies, central European
currencies are leading the way higher on the back of the euro that has moved
above $1.08 in the European morning. The softer dollar and lower interest rates
are helping gold stabilize after falling to almost $1975 yesterday (peak last
week was a record ~$2135). European benchmark 10-year bond yields are
mostly 4-6 bp lower. A larger than expected
Softer Tokyo CPI Buys BOJ Time while Moody’s Cuts the Outlook for China’s Debt following Fiscal Stimulus and the Continued Property Slump
2023-12-05
Overview: Outside of the Australian dollar, which
has fallen by around 0.6% following the RBA meeting and the softer final PMI,
which may have dragged the New Zealand dollar a lower by around 0.25%, the
other G10 currencies trading little changed ahead of the start of the North
American session. The eurozone and UK final PMIs were revised higher. Central
European currencies lead the emerging market currencies. China reported better
than expected Caixin PMI and Moody’s cut China’s sovereign outlook to negative
from stable. The yuan is little changed. Gold is quieter after
yesterday’s wild day that saw $115 range (~$2020-$2135). It is in around a $18
dollar range today centered near $2032. January WTI is largely steady. It has
fallen by about 6.2% in the past three sessions. Among the
The Dollar is Having One of Its Best Days This Month
2023-11-30
Overview: After being bludgeoned, the dollar
is having one of its best days of the month. It is rising against all the major
currencies. The Dollar Index is up about 0.5%, which is the most since the end
of October. The greenback is also firmer against all the emerging market currencies
but the Turkish lira and Russian ruble. Some of the demand for the dollar may
be a function of month end, but also the disappointing Chinese PMI, revisions
that show the French economy contracted in Q3, and softer than expected
eurozone CPI are also consideration. After slipping below 4.25%, the US 10-year
yield has recovered and is near 4.29%. It has fallen for the past three
sessions by slightly more than 20 bp. European benchmark yields are narrowly
mixed, though the 10-year Gilt yield is up almost
US CPI Front and Center, but Can Congress Avert a Government Shutdown?
2023-11-14
Overview: The dollar is somewhat better offered
today ahead of the October CPI report. The US House of Representatives may hold
a vote today on a continuing resolution to avoid a partial government shutdown
at the end of the week. Narrow ranges have prevailed. Most emerging market currencies
are firmer, though paradoxically, the South Korean won is the weakest, despite
a strong equity market rally (~1.2%), encouraged by the first in increase in
memory-chip exports in 16 months in October. Most of the large bourses in
the Asia Pacific rose with the notable exception of Hong Kong and India. Europe’s
Stoxx 600 is extending yesterday’s recovery and the two-day advance is
recouping most of the 1% drop seen before last weekend. US index futures are
trading with a firmer bias. Benchmark 10-year
Tags: #USD,Currency Movement,Featured,FOMC,inflation,newsletter
