by Marc Chandler
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Overview: The US dollar is little changed against most of the G10 currencies today. The antipodean currencies are the main exception. A modest change in tone from the Reserve Bank of Australia, boosting the chances of a rate cut early next year sent the Australian dollar back toward yesterday's lows, and the New Zealand dollar fell in sympathy. Most of the G10 currencies sporting softer profiles within the consolidative price action. The greenback is firmer against most emerging market currencies as well.
Equities are mixed. Japan and Chinese markets rallied, though the Hang Seng and mainland shares that trade in HK fell. South Korean equities, which have been battered by the political turmoil jumped today with the Kospi rising 2.4% and the KOSDAQ surging 5.5%. Europe's Stoxx 600 is threatening to snap an eight-day advance and US index futures are flat. The 10-year Chinese government bond yield slumped 7 bp to a new record low of 1.84%, despite talk of a larger budget deficit next year. European benchmark yields are slightly firmer, but the French premium over Germany continues to pull back. The 10-year US Treasury yield is up a slightly more than a basis point to 4.21%. Gold is firm near yesterday's high around $2675. January WTI is little changed as it hovers around $68.
Asia Pacific
Surprising no one, the Reserve Bank of Australia stood pat with its cash target rate at 4.35%, where has been since the quarter-point hike last November. However, RBA Governor Bullock's rhetoric has changed. She is now more confident that inflation is moving toward the 2%-3% target. The RBA acknowledged that the wages and growth have disappointed. The futures market leaned slightly in favor of a quarter point cut at the first meeting in 2025 (February 18) yesterday and leaned a bit more today (~60%)) after the RBA meeting and statement. China's Politburo issued encouraging remarks about providing more stimulus, but investors have seen much rhetoric over the past two months, but the economic impact seems minor at best. Many continue to look for lower interest rates and/or a cut in reserve requirements in the remaining few weeks of the year. Earlier today, China reported a 6.7% (year-over-year) rise in exports and a 3.9% slump in imports in November that produced a $97.4 bln trade surplus. That is slightly shy of the record set in June of almost $98.7 bln. Of note, shipments to the US reached their highest since September 2022. Exports to Southeast Asia also reached a reached a record. Both developments may reflect an attempt to front-run US tariffs promised by the incoming administration. Next Monday, Beijing reports November real sector data and house prices and sales figures. While Japan reports November PPI on Thursday, the highlight is the Tankan survey Friday. Little change is expected.
The US 10-year yield retraced the losses spurred by last Friday's employment report. It is now above 4.20%, which houses the 200-day moving average. This is helping lift the greenback to an eight-day high near JPY151.80. The 200-day moving average is closer to JPY152.00. After falling to a four-month low before the weekend (slightly below $0.6375), the Australian rebounded smartly yesterday. The dollar-bloc currencies and Scandis did well, ostensibly on China's commitment to provide more stimulus next year. The Aussie reached a three day high around $0.6470. The dovish hold by the RBA sent the Australian dollar back toward the recent lows below $0.6400. The low for the year was near $0.6350 in early August. Still, the intraday momentum indicators are stretched and suggest a recovery is possible in North America today. Initial resistance may be around $0.6425. Despite the yen's weakness yesterday, the offshore yuan traded with a stronger bias following the announcement of the Politburo's intention. The greenback traded below the 20-day moving average (~CNH7.2575) for the first time since the day after the US election before rebounding to above CNH7.27. It is near CNH7.26 in Europe. The PBOC set the dollar's reference rate at CNY7.1896 (CNY7.1870 yesterday). This is the fifth week that the PBOC is setting the fix well below prevailing levels to modify the yuan's fall and dollar rise.
Europe
Both the ECB and SNB are expected to cut rates this week. The market feels comfortable with a quarter point cut by the European Central Bank, but the Swiss National Bank is a different kettle of fish. The market is nearly evenly divided between a 25 bp and 50 bp move. Given that the target rate is already a lowly 1.0%, we think a quarter-point cut is more likely. Meanwhile, Europe is taking two initiatives. First, the multiyear negotiations between the EC and Mercosur for a free-trade agreement passed a necessary but not sufficient threshold. It must secure support from the national governments. A blocking minority is possible, and here Italy may be key. France, the Netherlands, Austria, and Poland appear opposed. The EU Parliament also must approve. Among Mercosur, Argentina may oppose. The second initiative is a new facility for joint defense bonds, where participation would be on a voluntary basis, and could include non-EU members, such as the UK and Norway. It is still early days, but this seems to be a promising development.
Even after the expiry of a billion euro of options at $1.06 yesterday, the euro stayed remained below the threshold, though the session higher was set about an hour later near $1.0595. The single currency consolidated in the North American afternoon mostly between about $1.0565-75. It is in a narrow range of mostly $1.0525-65. today. Chunky expiring options expire today that may mark the range: 1.35 bln euros at $1.05 and 1.50 bln euros at $1.06. Sterling recovered from early weakness (almost $1.2715) to reach nearly $1.28 in the North American morning yesterday. It is consolidating quietly today in a roughly $1.2735-65 range. The high after the US jobs report at the end of last week was a little higher (~$1.2810). In the $1.2820-35 area, the 200-day moving average and the (61.8%) retracement objective are found.
America
The US quarterly productivity report typically does not move the market but when thinking about the US outperformance, productivity is a critical aspect. Consider that in the five years through 2018, US productivity rose by about 1% per annum. In the past five years, it has averaged 2%. Unit labor costs, which incorporate wages, benefits, and productivity, initially surprised to the upside when reported in early last month. Unit labor costs in Q2 were revised from 0.4% to 2.4% and Q3 unit labor costs rose 1.9%, rather than the 1.0% expected by the median forecast in Bloomberg's survey. It is expected to be revised down to 1.3%. Still, the focus is tomorrow's CPI. Despite the above average job’s growth last month (227k vs. 173k average Jan-Oct), upward revisions in the past two months, and stronger earnings growth, the market is more confident of a Fed cut next week (~89% vs 63% on December 5). The Bank of Canada meets tomorrow. The jump in the unemployment rate (6.8% vs. 6.5%) boosted the odds of a 50 bp move (~87% vs. 48% a week ago). Meanwhile, Mexico's November CPI, reported yesterday, slowed a little more than expected, and this reinforces the sense that Banxico will cut rates next week.
The US dollar tested the CAD1.4100 area in early North American turnover yesterday after the mild follow-through buying in the Asia Pacific session lifted it to almost CAD1.4175. Dollar buyers were lurking around figure and lifted it back to session highs. Follow-through buying pushed the greenback closer to CAD1.42 today. Given the market's confidence of a half point cut by the Bank of Canada tomorrow (~87%), there seems little incentive to pick greenback top. The momentum indicators are trending higher and an important high in spot does not appear to be in place. The US two-year premium over Canada is at a new high since 1997 (~122 bp). There are options for $1.1 bln at CAD1.4275 that expire Thursday. The greenback held the pre-weekend low against the Mexican peso (~MXN20.1035), and it recovered to MXN20.2600 after Mexico reported a further moderation of price pressures. Follow-through buying today initially pushed the greenback above the previous session high today for the first time in six sessions. However, it was met with sellers that sent the US dollar back to almost MXN20.20. It is among the better performing emerging market currencies. Most emerging market currencies are lower and news that Brazil's President Lula had emergency surgery related to his recent fall may weigh on the real though the surgery was regarded as a success.
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