Overview: The US dollar is narrowly mixed against
the G10 currencies. The Canadian and Australian dollars lead the advancers,
while the Scandis are pacing the losers off 0.1%-0.2% in quiet turnover. Most
the freely accessible emerging market currencies are sporting softer profiles
today, the Chinese yuan is among them. However, most Asia Pacific currencies,
are firmer. Benchmark 10-year yields were softer in the Asia Pacific region in
mostly a catch-up to the eight-basis point decline in 10-year US Treasury yield
yesterday. The 10-year JGB yield of about 0.74% is 10 bp off its recent high. European
and US yields are firmer today and the peripheral premium in Europe is widening
today. The US Treasury raise $143 blin in bills yesterday and $109 bln in
coupons. Today it is back for $114 bln in bills and $39 bln of 7-year notes.
Outside of Tokyo and Hong Kong,
most large bourses were higher in the Asia Pacific region, led by more than 1%
gains in Taiwan and South Korea. Europe's Stoxx 600 is off by a little more
than 0.5%. If sustained, it would be the first back-to-back loss in three weeks.
US index futures are nursing small losses. Gold is consolidating slightly below
yesterday's six-month high near $2018.20. It has held above $2012 but looks
vulnerable to more selling pressure in North America today. January WTI has
steadied today after falling for the past four sessions. Yesterday's high near
$76.25 also corresponds to the 200-day moving average.
Asia Pacific
There are three highlights
from the Asia Pacific session. First, Australia reported a dramatic downshift in retail sales.
The 0.2% fall in October follows a heady 0.9% rise in September and an average
of gain of 0.6% a month in Q3. It should help mollify the central bank, which
has expressed concern about excess demand. Year-over-year, retail sales are up
1.2%, and on a per capita basis, real retail sales are off 1.6% year-over-year.
Most categories of retail sales were softer except food. The RBA meets on
December 5 and after a hike early this month, it is expected to standpat.
Still, the swaps and futures market pricing are consistent with another rate
hike in H1 24. Second, ahead of the Bank of Korea meeting later this week
(concludes on November 30), it reported October retail sales. It slowed to 6.4%
year-over-year from 9.5% in September. South Korea's base rate has been at 3.5%
since January, which as the last hike in a 300 bp tightening cycle. South
Korea's CPI peaked in January at 5.2% and stood at 3.8% in October. Third, the
US dollar recovered from new lows for the year scored yesterday against the
Hong Kong dollar amid a scramble for cash that has driven up the Hong Kong
interbank offered rate (HIBOR) over 5.5% to its highest level since October
2007. This seems to reflect a combination of year-end demand and poor liquidity
(aggregate balance), after the HKMA drained funds earlier this year to protect
the fixed exchange rate.
Softer US rates saw North
American operators push the dollar to session lows yesterday near JPY148.65 and
in Asia earlier today it fell slightly below JPY148 before recovering to almost
JPY148.85. The
five-day moving average moved below the 20-day moving average on November 20
and has not looked back. It was the first cross since late July. A nearby cap
has been forged around JPY149.70-75, though initial resistance now is likely
near JPY149. Last week's low was about JPY147.15. The Australian dollar
spent little time in yesterday's North American session below $0.6590 and it
settled above $0.6600 for the first time since August 1. It met the
(50%) retracement objective near $0.6585 last week of the losses since the
mid-July high (~$0.6900). That area offers initial support now. It extended its
rise for a fourth consecutive session, despite the disappointing retail sales
report. It reached slightly through $0.6630. The next retracement (61.8%) is
about $0.6660. The greenback is in a narrow range of roughly
CNY7.1465-CNY7.1545 range, which is inside yesterday's range. The PBOC
set the dollar's reference rate at CNY7.1132 (CNY7.1159 yesterday and CNY7.1151
on Monday). The average response in Bloomberg's survey was for CNY7.1435
(CNY7.1465 yesterday).
Europe
Germany has reported the
results of four surveys this month. The ZEW survey showed expectations improved (9.8 vs. -1.1)
to the highest since March, while the current assessment remains dour (-79.8
vs. -79.9). The flash PMI improved more than expected, but all three readings
remained below the 50 boom/bust level. The IFO survey improved from October,
but not as much as had been expected (judging from the median forecast in
Bloomberg's poll). Still, the overall assessment of the business climate edged
higher for the third consecutive month, and at 87.3 matches the highest here in
H2 23. Earlier today, the December GfK consumer confidence survey was released.
It showed a slight improvement to -27.8 from a revised -28.3 (from -28.1). Meanwhile,
the larger fiscal drama continues to play out following the constitutional
court ruling against efforts to redirect off-balance sheet Covid funding for
climate change. It is straining the governing coalition as well internal party
tensions for the Greens and Free Democrats. A poll by ZDF, the public
broadcaster, found SPD and Greens each draw about 15% support, while the FDP is
at 5%. Still, ZDF found that 61% of the public want to keep the debt brake,
which the SPD and Greens want to ease.
The euro set a range last
Tuesday/Wednesday that still is operative: ~$1.0850-$1.0965. Since then, the euro has made higher lows
and higher highs within that range. The euro came within 2/100 of a cent of
that high earlier today in Asia, while the high in Europe has been slightly
below $1.0960. Given the run-up--and this could be the euro's best month
(~3.6%) since November 2022, the stretched momentum indicators, the achievement
of technical retracement objectives, and the widening for the past two sessions
of the US two-year premium over Germany--a risk of a pullback is still palpable
before $1.10 is overcome. There are options at $1.10 for about 737 mln euros
that expire today and another batch for 1.37 bln euros on Friday. On
the other hand, sterling charges on, reaching almost $1.2645 yesterday, the
highest it has been since September 1 and is near it in late European morning
dealings now. We suspect that part of sterling's advance has been
driven by short covering. Speculators in the futures have been net sellers of
sterling ever week since the last week of August with one exception. The net
short position in mid-November was the largest since January. Sterling may also
be benefitting from the adjustment to rate expectations. Last Monday, the swaps
market had about a 55% chance of the first BOE cut next May. The odds have
fallen to below 20%. For sterling to meet the same retracement of the March
decline as the euro, it would need to rise to $1.2720.
America
House prices in the US are
expected to have firmed slightly in September. Still, the 0.4% increase in the FHFA price
index of purchased house would be the weakest since January. Through August,
its index has risen by about 0.6% a month. In the same period last year, the
average was 0.8%. S&P CoreLogic Case-Shiller index of house price in 20
large cities is expected to firm by around 0.7%, which would bring the
year-over-year rate to 3.95%, the most this year. Consumption is thought to be
driven by the wealth effect, which is a function of income and appreciation of
assets. The S&P 500 is up about 18.5% and the Russell 3000 is up about
17.5% this year. The Conference Board's measure of consumer confidence and the
Richmond and Dallas Fed November surveys are due. Separately, Fed Governor
Waller, who tends to be among the hawks, and Chicago Fed President Goolsbee,
perceived to be among the more dovish voting members of the FOMC this year
speak today. A consensus appears to have emerged in favor of standing pat.
Recall that the September Summary
of Economic Projections showed that the median projection saw two more
hikes this year as being appropriate, and it looks like none will be delivered.
It anticipated two cuts next year, even though the median forecast by Fed
officials saw the PCE deflator remaining above the 2% target.
The US dollar was in a
narrow range on both sides of CAD1.3640 yesterday and has been sold to
CAD1.3575 today, its lowest level since mid-October. The greenback has not closed below CAD1.36
since mid-October. There are about $925 mln of options struck at CAD1.36 that
expire Friday (after Canadian jobs data). That area is also around the (38.2%)
retracement of the rally from mid-July low slightly below CAD1.3100. The next
target is the CAD1.3500-20 area. However, the CAD1.36 area may also be the
neckline of topping formation that projects toward CAD1.33 (medium-term). A
word of caution comes from the Bollinger Band, where the lower band is a little
below CAD1.3585. Mexico recorded a smaller than expected October trade
deficit ($252.5 mln, about 1/6 of the deficit of the median forecast in
Bloomberg's survey and a 1/8 of the October 2022 shortfall). Exports
rose by 4.6% in the month while imports rose 2.1%. The peso rose to a two-month
high before pulling back. The US dollar fell slightly through MXN17.0350 and
recovered to a little above MXN17.21 amid reports quoting Heath, the deputy
central bank governor suggesting that the first rate cut could take place in
February or March 2024, which is a bit earlier than many expected. Of course,
the guidance was conditioned on inflation continuing to decline. The greenback
is in a narrow range so far today: ~MXN17.1480-MXN17.1845. Initial
support may be near MXN17.12-13 today.
Overview: The dollar is beginning the week on
a soft note, despite the modest backing up of yields over the last couple of
sessions and better than expected data, including Black Friday sales and the
preliminary November PMI. It is sporting minor losses against all the G10
currencies, but the Canadian dollar, which is the weakest of the major
currencies this quarter and month. The greenback is also lower against most
emerging market currencies, but the Turkish lira and Chinese yuan. Gold is extending
its two-week rally and reached $2018, its best level since mid-May. Ahead of
the delayed OPEC+ meeting, January WTI is heavy near $74 a barrel. Last week's
low was near $73.80 and this month's low was around $72.40.
Global equities are weaker. Shadow
banking woes weighed on Chinese shares, but Taiwan led the region's losses
following the opposition's failure to agree on a single candidate for next
month's election. This raises the risk of more intimidation action by China.
Europe's Stoxx 600 is threatening to end a three-day rally. It had reached
two-month highs ahead of the weekend. US index futures are trading with a
slightly heavier bias. The 10-year US Treasury yield is steady after edging up
three basis points last week. European benchmark yields are mostly 3-5 bp
lower, unwinding most of last week's increase.
Asia Pacific
Beijing is stepping up its
efforts to stabilize the property market and ease pressure on Chinese banks. Under consideration are several measures
that include a CNY1 trillion (% of GDP, or ~$140 bln) support for public
housing and urban renewal and allowing banks to offer unsecured short-term
loans to qualified developers for the first time. These are ostensibly working
capital loans. Policy makers are said to be finalizing a list of 50 property
developers that will be eligible for new support. Reports suggest Beijing is
also discussing a mechanism that would allow a single lender to take the lead
to support a specific distressed developer by coordinating with other lenders.
One industry estimate is that it would take CNY3.2 trillion (~$445 bln) to
complete that remaining housing units. Earlier efforts, such as easing mortgage
rules for homebuyers, reductions in down-payments, income tax rebates, and a
CNY200 bln special loan package to help finish building projects failed to turn
around activity and sentiment.
The Japanese economy
contracted by 0.5% quarter-over-quarter in Q3, well below expectations for a
0.1% decline in output. The government followed that up with its first downgrade of its
economic outlook in ten months. It seemed to blame weak demand in the world
economy, notably China, but Q3 GDP weakness was not just due to weaker net
exports but also a decline in consumption and business investment. Meanwhile,
Japan's headline inflation accelerated in October, as hinted by the Tokyo CPI
figures, and at 3.3% is above US CPI (though, of course, measured differently).
The dollar recorded a three-day low against the yen (~JPY148.80) in late Asia Pacific turnover, but
quickly snapped back to around JPY149.35 early in Europe. Yet it is struggling to maintain that upside momentu, It had been in a narrow range of
about JPY149.00-JPY149.70 in recent days. The consensus is highly
convinced that the BOJ raises rates next year and this may see some market
segments sell into dollar rallies. The Australian dollar extended its
two-week rally, nearly 3.5% rally today, edging up to $0.6600. It is the
best level since August 10. It met the (50%) retracement of the decline
since the mid-July high (~$0.6900) and it is fraying the 200-day moving average
(~$6585) but has not closed above it is since late July. The next retracement
(61.8%) is near $0.6660. Still, we note that the intraday momentum indicators
are stretched and some backing and filling in North America today would not be
surprising. Meanwhile, the greenback appears to be forging a base
against the Chinese yuan. A four-month low was recorded last week near
CNY7.1265. On November 22, the dollar traded in a roughly CNY7.1365-CNY7.1650
and has been in that range since. The PBOC set the dollar's reference rate at
CNY7.1159 (CNY7.1151 on Friday) and the average in Bloomberg's survey was
CNY7.1465.
Europe
The rating agencies are busy
at the end of the week. Fitch will update its assessment of Greece (possible upgrade,
which would match S&P's decision last month), Ireland (may also be upgraded
from AA- with a positive outlook), and the UK (looks most likely to be
unchanged at AA-). S&P reviews Poland (likely unchanged at A-), France
(likely unchanged at AA), and Lithuania (its A+ rating may be at risk though
the outlook was stable). Moody's assesses Finland and will likely maintain the
A+ rating, which is shared by the other major rating agencies. Germany and Spain
are reviewed by DBRS (likely unchanged at AAA and A, respectively, though given
the fiscal developments in Germany discussed below, and the shroud of
uncertainty now could spur some more cautionary language.
There seemed to be little
market reaction to news of that the far-right in the Netherlands secured more
seats (35) than any other party. There may be several reasons for this. The most benign explanation
is that given the fragmented nature of Dutch politics (no threshold for
representation in parliament), a coalition is inevitable and Wilder and his
Freedom Party, are not going to find sufficient coalition partners to form a
new government. Also, immigration is a polarizing issue. The Green Left Labor
fusion ticked did second best and saw its combined number of seats rise to 26
from 17 previously. In addition, the political winds seem to bolster the
support for the right in much of Europe. The AfD in Germany and Le Pen in
France are polling well, and Italy's Meloni and the Brothers of Italy (pro-NATO
and pro-EU) have been less disruptive than many anticipated.
The move back above 50 in
the UK's service and composite flash November PMI reported last week was a
surprise and seemed to support the BOE's push back against the aggressive
easing the swaps market had discounted. The market had been pricing in nearly 100% confidence of a
cut by the end of Q2. Now it is slightly less than 40%. The UK's two-year yield
bottomed near 4.44% on November 17 and is now near 4.70%.
The euro met the (61.8%)
retracement of its sell-off from the high for the year set in mid-July last
week near $1.0960. Profit-taking
knocked it to about $1.0850 but it climbed back to $1.0945 at the end of last
week. It remains firm today, though holding slightly below $1.0960. There are
options for around 935 mln euros that expire today at $1.0950. Initial support
is now seen in the $1.0920-30 area. Sterling pushed above $1.2600 ahead
of the weekend for the first time since early September and pushed slightly
through $1.2625 today. Options for almost GBP320 mln at $1.2600 expire
today. The intraday momentum indicators suggest the session high may not be in
place yet. Sterling has moved higher in five of the past six sessions and
met the (50%) retracement of its sell-off from the high for the year set in
mid-July around $1.2590. The (61.8%) retracement is near $1.2720.
America
US interest rates rose last
week but the dollar did not find much traction. The 10-year yield rose nearly a dozen
basis points in the past two sessions and the two-year yield rose ten basis
points. The implied yield of the December 2024 Fed funds futures contract
implies slightly less than 75 bp of easing next year, down from pricing in a
30% chance of 100 bp November 17. Meanwhile, the greenback fell against all the
G10 currencies, and the JP Morgan Emerging Market Currency Index rose for the
second consecutive week and the sixth week in the past seven. In this cycle, the dollar does not appear to have deviated from the interest rate signal. This
would suggest scope for the dollar to recover, and as we have noted, the
momentum indicators are getting stretched and key technical objectives have
been met. On the other hand, if the dollar does continue to sell-off, it would
lend credence to ideas that a larger dollar top has been forged after the
mid-July-early October rally. Meanwhile, early indicators suggest strong
Thanksgiving and Black Friday sales in US. Today, "Cyber Monday"
finishes the five-day period that may account for a little less than a fifth of
holiday shopping. The US reports October new home sales and a decline of nearly
5% is expected after a 12.3% surge in September.
This week's Canadian
highlight is Friday's November jobs report. The stronger than expected September
retail sales data helped send the Canadian dollar to new highs for the month
before the weekend. The greenback recorded a low slightly below CAD1.3600 but
has recovered to about CAD1.3660 today. Resistance is now seen in the
CAD1.3680-CAD1.3700 area. The Canadian dollar continues to be a laggard. It is
the only G10 currency that is softer against the dollar today. Mexico
revised up Q3 GDP to 1.1% from 0.9% before the weekend, but the peso remained
confined to the range from November 21 (~MXN17.0660-MXN17.2690). It is
testing the lower end of the range in Europe. Mexico reports October trade
figures today. We continue to anticipate at test on the MXN17.00 area, which it
has not traded below since early September. Although Mexico runs a trade
deficit there are three elements of the context that the market appears to take
into account. First, it is a small deficit. Second, exports remain strong
despite the appreciation of the peso. Third, the trade deficit is more than
covered by worker remittances (due Friday) and offering Mexico a layer of
isolation from the whims of global capital markets.
The dollar fell against all the
G10 currencies last week. The dollar-bloc currencies, sterling, and the Scandis led the move, appreciating by about 0.55%-1.40% against the US dollar. The dollar bloc and sterling recorded new highs for the month ahead of the weekend. Against
the others, the dollar spent most of last week consolidating after its recent
losses were extended at the start of the week. Still, our review of the
technical condition warns that the US dollar's pullback appears to be entering
its final stages, with retracement targets being met and momentum indicators
stretched.
In terms of high-frequency
economic data, there are a few highlights in the week ahead. The US CPI
suggests the November PCE deflator will slow after being stuck at 3.4% since
July. The eurozone's preliminary November CPI may edge lower to 2.7%, down from
10.0% in November 2022, though this might be a bottom for a couple of months.
China's PMI may find some traction from the rash of measures recently announced
to support the economy and property market. The Fed's Beige Book is due Wednesday,
but it is unlikely to change ideas that central bank is on hold. The Reserve
Bank of New Zealand meets the same day and is also seen standing pat. The
delayed OPEC meeting is now scheduled for Thursday, which is also when COP28
starts. Ending the week on December 1, Canada reports its November employment
situation and Federal Reserve Chair Powell speaks at two venues.
United States: The market wants to see confirmation of
its two priors: that growth is slowing markedly, and price pressures are
cooling. Reports that could impact GDP forecasts include the October trade
balance (likely a slightly larger deficit), retail inventories (big jump in
Q3), personal consumption expenditures (to slow to around 0.2% from 0.7% in
September and an average of 0.6% this year), construction spending (median
forecast in Bloomberg's survey is for 0.4%, which would match the September
gain), and November auto sales (median forecast is for an unchanged 15.5 mln
unit SAAR pace). There seems to be little doubt that the world's largest
economy is slowing. The question is about the magnitude. It is important that
price pressures also continue to moderate. The CPI (and PPI and imported
prices) suggest price pressures have eased, which should be confirmed by the
PCE deflator. A 0.1% month-over-month increase will allow the year-over-year
rate to slow to 3.0%-3.1%. That would be the lowest since March 2021 and
follows four months stuck at 3.4%. The core rate may edge up by 0.2%, which
would still allow the year-over-year rate to slip to 3.5% from 3.7%.
The implied yield of the
December 2024 Fed funds futures rose by about 8.5 basis points last week and
at about 4.59%, the market has 74 bp of easing discounted. It had been flirting
with four cuts recently. The Dollar Index recovered from a low near 103.15, its lowest
level since early September, to about 104.20 were it stalled. It hovered around
the middle of the range ahead of the weekend. The 103.45 area is the (50%)
retracement of its rally from mid-July (~99.60) to the early October high
(~107.35). The 200-day moving average is about 103.60. The next retracement
(61.8%) is closer to 102.55. Momentum indicators appear to be basing in over-extended
territory. A move above 104.25 could target the 105 area.
China: Beijing and the PBOC have announced
several initiatives in recent weeks to support the economy, and it would be
disappointing if the measures failed to bolster sentiment among the purchasing
managers. While interest rates have been left unchanged, the PBOC has made
sizeable injections of liquidity. The central government will boost its deficit
by CNY1 trillion and is considering launching another CNY1 trillion fund to
support public housing and urban renewal. The PBOC launched a facility to help
relieve the debt stress of some local governments. President Xi seemed to have
gone on a charm offensive with Mastercard getting its long-awaited permission
to enter into a local JV, considering ordering Boeing Max 37 airplanes, new soy
purchase orders, will lend the US a couple of pandas, and after repeated
denials it can do anything about the fentanyl trade, more efforts were
promised. That said, reports suggest that China's aerial harassment of Taiwan
continued. US gestures are not clear outside of easing export restrictions on
one Chinese company.
The yuan has had its best two
weeks since early January, rising by about 1.9% against the greenback. Even as
the dollar fell, the PBOC set its dollar reference rates at lower levels every
session last week. It began the week at CNY7.1612 and the fix ahead of the
weekend was at CNY7.1151. The gap between the market projections (Bloomberg
survey) and the actual fix has also narrowed over the past two weeks. While
many are now talking about a test on the CNY7.00-05 area in the coming weeks,
we suspect the greenback may rise first toward CNY7.19-CNY7.22.
Japan: Japan has an extraordinarily accommodating
monetary policy and fiscal support in the form of a 5.5% deficit/GDP this year.
The government is in the final stages of approving another supplemental budget.
In terms of the OECD's measure of purchasing power parity, the yen is
undervalued by historical proportions. And yet the economy struggles. It has
contracted in two of the past four quarters. Private domestic demand and
capital expenditures have fallen for the past two quarters. This week's data,
especially October retail sales and industrial production will shed light on
economic activity as Q4 got underway. Modest gains are expected. Disappointment, and any sign that the
economy may still be contracting, will likely impact expectations for the Bank
of Japan. Japan's October employment report is due on December 1. Despite
above-target inflation, the Japanese government and the BOJ stand out among the
G10 as the only ones encouraging higher wages. Unemployment was mostly
2.5%-2.7% in 2022. This year's range was set in Q1: 2.4%-2.8%, and in
September, it was in the middle of the range.
The dollar appears have carved
a potential double top against the Japanese yen this month near JPY151.90. The
low between the two highs was about JPY149.20 (neckline). The measuring
objective is found by rotating the pattern around the neckline and that would
give a target of around JPY146.50. Last week, the dollar stopped shy of that at
around JPY147.15, and proceeded to recover to about JPY149.75, where it stalled.
Nearby resistance is seen a little above JPY150 and the 20-day moving average
is a little higher (~JPY150.25). The momentum indicators look poised to turn
higher in the coming days.
Eurozone: The highlight of the week is the
preliminary estimate of November CPI. The dramatic improvement that has seen
the year-over-year rate slow from 5.3% year-over-year in August to 2.9% in
October may have a little more downside scope. A decline in German and Italian
consumer prices in November, may allow the aggregate pace to slow to 2.7%,
according to the median projection in Bloomberg' survey. Still, the risk is
that headline CPI moves higher in the coming months December and January. The
swaps market has almost a 60% chance that the first cut will be delivered next
April. This may be pushed back into Q3 24. Last week there were two highlights.
First, the German Constitutional Court ruling against the government's efforts
to re-purpose off-budget Covid funds for climate change. This blew a 37 bln
euro (~$40 bln) hole in this year's budget and prompted a reluctant Finance
Minister Linder to endorse the debt brake waiver again. This intensified concerns
about increased government debt issuance and when the Bundesbank acknowledged
that book value of bank bond holdings are above market values, meaning that
selling would realize losses. Second, the anti-immigration and anti-EU Freedom
Party secured the more seats than any other party in the Dutch election. Still,
with 35 seats out of 150, and few willing to be in a coalition with the Freedom
Party, a period of uncertainty will persist for some time. The right appears in
the ascendancy in several European countries, with Le Pen in France and the AfD
in Germany polling better. Italy's right-wing government, led by the Brothers
of Italy, has not been as disruptive as many feared. Prime Minister Meloni has
been pro-NATO and pro-EU and finds common ground with Germany, UK, and arguably
the US on its immigration stance.
The euro stalled on November 21 a liitle above $1.0960, the (61.8%) retracement of its losses since the July
high (~$1.1275 to ~$1.0475). It pulled back to almost $1.0850 before recovering
to $1.0950 ahead of the weekend. The momentum indicators are stretched, and the
Slow Stochastics have turned lower. The US premium over Germany for two-year
money narrowed in the first four sessions last week to the lower end of its
nearly two-month range (~185 bp) but steadied ahead of the weekend and looks
poised to recover. $1.10 offers psychological resistance. On the downside, a break of the $1.0850-75 area would likely signal that the
nearly two-month advance in the euro is over, and a corrective/consolidative
phase is at hand. That said, it may take a break of the $1.0795-$1.0800 area to
signal a proper correction rather than consolidation.
United Kingdom: The UK reports October consumer
credit and mortgage lending in the week ahead. These are not market movers even
in the best of times. Since the Autumn statement in the middle of last week, UK
rates and sterling have risen. The 10-year Gilt yield has risen by nearly 20
bp, and the two-year yield is up nearly as much. On November 20, the swaps
market implied slightly more than a 55% chance of a cut by the end of May. By
the end of last week, the chances were reduced to practically zero. Sterling
reached $1.2615 ahead of the weekend, its best level since September 5, and met
the (38.2%) retracement of the losses since the July high ($1.3140). The next
retracement (61.8%) is about $1.2720. The momentum indicators are stretched.
Initial support is around $1.2500, while a break of last week's low near
$1.2450 could spur a 3/4-1-cent decline.
Canada: In a quirk of the calendar, Canada
will report its November employment data on December 1, a week before the US. Canada
did lose full-time jobs in October (3.3k) and there is a general sense that the
labor market is slowing. The unemployment rate has risen to 5.7% from 5.0% in
April. The participation rate (65.6%) is unchanged from April. However, Canada
grew 288.1k full-time positions through October compared with 285k in the first
ten months of last year. The 12-month moving average of the change in the
annual wage rate for permanent employees continues to hover around 5%, almost
double of the 12- and 24-month average before Covid. Canada also reports Q3 GDP.
The 0.4% median forecast in Bloomberg's monthly survey seems a little
optimistic given that the monthly GDP estimates were flat in July and August
after contracting by 0.2% in June. The market has recognized the economic
trajectory and taken the two-year yield down from nearly 5% in early October to
the 200-day moving average last week near 4.35%. Stronger than expected
September retail sales (0.6% vs. median forecast of a flat report) helped rates
and the Canadian dollar recover. The two-year yield approached 4.50% before the
weekend. According to the swaps market, there is now about a 50% chance of a rate
cut next April, down from more than 80% around middle of the month. The
greenback finished last week with a push below the trendline drawn off the
mid-July low for the year, the late September, low and the November 3 low,
found near CAD1.3655. It made a new low for the month slightly below CAD1.3600
ahead of the weekend. A convincing break of it, could spur a move toward the
CAD.1.35 area.
Australia: The market has not been persuaded by
news recently that Australia's employment rose by twice what was forecast by
the median in Bloomberg's survey or the hawkish tone by central bank Governor
Bullock. Annual wage growth reached a 14-year high in Q3 of 4%. The futures
market has discounted a little more than a 20% chance of a hike in H1 24. As
recently as November 14, the market had more than a 55% chance of a hike. The
wage and employment data were released on November 15-16. Australia reports
October CPI on November 29. The pace had slowed from 8.4%, the peak set at the
end of last year to 4.9% in July. In August and September, it reaccelerated to
reach 5.6%. It is expected to unwind the September gain and return to 5.2%.
This would typically be the highlight of the week. However, Bullock's comments
draw attention to demand and the market may be sensitive to the retail sales
report out (November 28), the day before the CPI. Retail sales jumped by 0.9%
in September and when this was reported on October 30, three times higher than
expected that seemed to prompt some to anticipate the rate hike that was
delivered a week later. Retail sales rose by an average of 0.6% in Q3 after a
flat Q2 and an average of 0.8% in Q1. A slowdown in retail sales and CPI could
cap the Australian dollar in the $0.6600 area, which houses last week's
high, the (50%) retracement of the losses since the July high (~$0.6900) and
the 200-day moving average. The momentum indicators are stretched. Initial
support may near $0.6520.
Mexico: The upcoming data will showcase Mexico's
strengths. Exports near record levels despite the appreciation of the peso over
the last two years. The near-shoring/friend-shoring narratives favor it.
Mexico's trade deficit trade deficit of about $10.1 bln through September is
less than half of what it was in the first nine months of 2022 (~$25.7 bln). And
that trade deficit is more than covered by worker remittances (~$47 bln in
Jan-Sept 2023 vs.~ $43 bln in Jan-Sept 2022). Mexico's economy is among the
region's best performers, and the manufacturing PMI and IMEF surveys should
confirm it. At the end of last week, Q3 GDP was revised higher to 1.1%
(quarter-over-quarter), up from 0.9% initially. Note that Brazil's economy may
have stagnated or contracted slightly in Q3 and Colombia unexpected contracted
by 0.3% in Q3. The central bank's inflation report will be published on
November 29. Mexico's institutional strength, including the independence of
Banxico and the judiciary, may allow for compromises, as it were, in other
areas without alienating investors. While the central bank hesitates to begin
its easing cycle, it has begun adjusting its language, seemingly validating
expectations of a cut before the mid-year election. Last week, dollar set the
range on November 21 (~MXN17.0655-MXN17.2690). It held below MXN17.20 ahead of
the weekend. The objective of the double top carved last month anear MXN18.50
is near MXN17.00. The momentum indicators are stalling. A move above last
week's high could spur dollar gains toward MXN17.40-50.
Price Action:
Since the North American markets closed Wednesday, the foreign
exchange market has been subdued. Most of the major currencies are
+/- 0.2%. The Antipodeans and sterling have risen a bit more.
The euro is in the middle of this week's range (~$1.0850-$1.0965).
The dollar is at the upper end of this week's range against the Japanese
yen (~JPY147.15-JPY149.75). Sterling is trading near the high for
the week set in Europe today near $1.2565. Recall that the $1.2590
area is the (50%) retracement of the losses since the March high
(~$1.3140). The Australian dollar is firm but holding below the week's
high (~$0.6590) and the 200-day moving average (~$0.6585). The US
dollar settled on Wednesday slightly above CAD1.3685. It has been in
a range of roughly CAD1.3650-CAD1.3710 but is trading near the Wednesday's
settlement. The greenback is consolidating within the range set on
Wednesday against the Chinese yuan (~CNY7.1365-CNY7.1650).
Developments
Overview: Corrective
forces helped the dollar stabilize yesterday and it enjoys a firmer today. The
euro has slipped below $1.09, and the dollar has resurfaced above JPY149.00. The
FOMC minutes seem dated by the more than 30 bp decline in the US 10-year yield,
the 7% rally in the S&P 500 and roughly 3% drop in the Dollar Index. The
implied year-end 2024 Fed funds rate has fallen by 10 bp to 4.51% (5.33%
currently). The Japanese government downgraded its economic outlook for the
first time in ten months. While the recovery is judged to still be intact, some
parts have "paused", it said. The dollar's gains against the are the
most in a week. The greenback is also firmer against most emerging market currencies
too.
Benchmark 10-year yields are little
changed, though Gilts are underperforming ahead of Chancellor Hunt's Autumn
Statement shortly. The 10-year US Treasury yield is near 4.39%. While the
Nikkei posted an outside up day, most of the other large regional markets were
sold, dragged lower by the tech sector. Tech is less represented in Europe and the
Stoxx 600 is recouping yesterday's minor loss and a little bit more. US index
futures have turned higher from earlier losses. Gold jumped 1% yesterday and
reached about $2007.60. It is consolidating in mostly a $5-band on either side
of $2000. A rise in US oil inventories (~9 mln barrels estimated by API) is
helping cap the price of crude today. The January WTI contract is has traded on
both sides of yesterday's range (~$76.90-$77.90). The market may be reluctant
to take on new positioning ahead of the upcoming OPEC+ meeting.
Asia Pacific
The dollar fell to four-month lows
against the Chinese yuan. When the yuan moves, the sheer size of the state-owned Chinese
banks are typically involved. The US Treasury's recent
report on the international economy and the foreign exchange markets
said: "Additionally, multiple press reports provide evidence of
state-owned banks taking actions that resist depreciation pressure--including
increasing dollar sales in exchange for RMB in the onshore and offshore spot
and forward markets--with some reports explicitly tying this behavior to
instructions from the Chinese authorities." Leaving aside if such press
reports truly provide evidence for their claims, often citing unnamed people
who are not authorized to speak, making such claims nearly impossible to
verify. Some press reports suggest that state-owned banks are swapping yuan for
dollars in the offshore market and then selling the dollars onshore.
Ostensibly, the hope was to force exporters, who have been holding on to their
dollars, to sell. Are we to conclude that the PBOC intervened? It does not seem
reasonable to conclude that all the foreign exchange transactions by China's
large banks are on behalf of the central bank. They obviously conduct
commercial transactions on behalf of clients and likely trade for their own
account. In any event, the sharp appreciation of the yuan is seen giving the
PBOC room to maneuver and a cut in reserve requirements seems consistent with
recent efforts that focused on liquidity provisions more than reducing interest
rates.
Tomorrow, Australia sees the preliminary
November PMI. The
manufacturing PMI was last above the 50 boom/bust level in February and at 48.2
in October, it was near the year's low. The services PMI was mostly above 50 in
H1 but at 47.9 in October, it is also near the year's low. The composite PMI
slumped to 47.6 in October (from 51.5), which is the low this year. The Reserve
Bank of Australia insists that the remaining inflation challenge is
"increasingly homegrown and demand driven" and Governor Bullock
argued that it is precisely because of this that "more substantial
monetary policy tightening is the right response to inflation that results from
aggregate demand exceeding the economy's potential to meet that
demand." The market is not there. The futures market has about a 23%
chance of a hike discounted by the middle of next year. That is a little less
than a week ago.
Early Friday, Japan reports its national
CPI figures for October and sees its preliminary PMI. The signal on Japanese price
pressures comes from the Tokyo CPI, which is released a few weeks before the
national estimate. Although the weightings are different, the Tokyo CPI is a
fairly accurate guide. The year-over-year headline and core rates accelerated
by 0.5% (to 3.3%) and 0.2% (to 2.7%), respectively. The measure that excludes
both fresh food and energy eased to 3.8% from a revised 3.9% (initially 3.8%).
Note that BOJ officials had the Tokyo CPI in hand when it met at the end of
last month. The national figures should show a little less acceleration in the
headline pace (to 3.4% from 3.0%) and a similar rise as Tokyo in the measure
excluding fresh food (3.0% vs. 2.8%), while the ex-fresh food and energy may
slow to 4.1% (from 4.2%). Japan's manufacturing PMI has been above 50 once this
year and that was in May. Japan's manufacturing sector likely continued to
contract in November. Japan's services PMI has been above 50 for the entire
year but is has fallen in four of the past five months, and its 51.6 reading in
October was the lowest of the year. The composite PMI has also held above 50
this year, and after declining in September and October, it stands at 50.5 the
lowest this year.
The dollar gradually recovered from the
JPY147.15 low reached yesterday in late Asia Pacific turnover. The session high was recorded in
North America near JPY148.60. The dollar appears to have forged a bullish
hammer candlestick pattern. Follow-through buying lifted the greenback to
JPY149.35 today. The JPY149.50 is around the (50%) retracement of the leg down
from the November 13 high near JPY151.90. The next retracement (61.8%) is by
JPY150.10, slightly below the 20-day moving average (~JPY150.25). According
to Bloomberg, the Australian dollar came within 1/100 of a cent of its 200-day
moving average at $0.6590 yesterday. It retreated until it found bids
near $0.6545, around 1/10 of a cent above Monday's low but was fell to almost
$0.6525 today before recovering to $0.6560 in early European turnover. Nearby
resistance is seen near $0.6570. The Chinese yuan is snapping a six-day
advance. The dollar had fallen to about CNY7.1265 yesterday and its upticks
today have entered the gap created by yesterday's sharply lower opening. The
gap extended to Monday's low (~CNY7.1640). The dollar has traded slightly above
CNY7.1540 today. The PBOC set the dollar's reference rate at CNY7.1254, the
weakest since June. The average projection in Bloomberg' survey was CNY7.1432.
In the offshore market, the dollar tested the 200-day moving average near
CNH7.13 yesterday and today. It has recovered to around CNH7.1640.
Europe
There are three European highlights in the
remainder of the week. First, the Dutch are voting today, and it will have a new prime
minister after 13 years of leadership by Rutte and the People's Party for
Freedom and Democracy (VVD). Rutte will remain caretaker until a new government
is in place and it could take some time. Running to replace Rutte is a woman
and a former refugee who is embracing a restrictive immigration policy. A
center-left bloc of Labor and Green Left is running neck-to-neck with the VVD.
However, the strong polling by the Party for Freedom (PVV), led by the
anti-immigration and nationalist Wilders, makes it a three-way contest. One
poll earlier this week had the PVV slightly ahead of the VVD.
Second, Sweden's Riksbank meets
tomorrow. In
Bloomberg's survey, 13 of the 21 economists look for the Riksbank to deliver a
25 bp hike to bring the repo rate to 4.25%. The swap market is less sanguine,
and it has about a 50% chance of a hike discounted. We are more inclined to see
the Riksbank standpat. The economy is contracting, and inflation is falling.
Moreover, the currency has been on a tear since the central bank announced on
September 21 that it would "hedge" part of its reserves by selling $8
bln and 2 bln euros. The krona has rallied about 7.2% against the dollar and
4.6% against the euro.
Third, the eurozone and UK see their flash
PMIs tomorrow. They
are not expected to change by much, which reinforces the sense that the euro
and sterling's recent appreciation is more about the dollar than positive
economic impulses from Europe. Economists expect the eurozone to stagnate in Q4
after contracting by 0.1% in Q3. The ECB's forecast of 0.7% growth this year
still looks a bit optimistic. The UK economy stagnated in Q3, and the median
forecast in Bloomberg's monthly survey sees the British economy flat in Q4 and
Q1 24. The median projection of 0.5% growth this year matches the BOE's
forecast.
The euro is tired. It brought in the last buyers as it rose
above the previous session's high for the fourth consecutive day yesterday and
met the (61.8%) retracement of its decline from the July high (~$1.0960) and
overshot it by 5/100 of a cent before it turned tail and slipped back to $1.09.
Follow-through selling to it slightly below $1.0885. It requires a break of
$1.0875 to signal anything of technical importance. It has since been capped
near $1.0920. The consolidative/corrective pressures we anticipated do not seem
finished. Sterling fared better than the euro and is inside yesterday's
range (~$1.2500-$1.2560). It retained its bid tone even after reaching
almost $1.2560, its highest since September 6. However, the (50%) retracement
of its losses since the mid-July high is still a little way off near $1.2590.
The (61.8%) retracement, like the euro fulfilled, is about $1.2720 for
sterling. The key event of the day for the UK, Hunt's fiscal statement is
awaited but the details appear to have largely been leaked. He reportedly will
make permanent an investment tax break ("fully expensing" investment)
and cut the national insurance (payroll tax). We expect limited market
reaction.
America
The US economy is slowing, and the
immediate question is the magnitude. Due to tomorrow's US holiday, today's reports include
weekly jobless claims, October durable goods orders, and the final November
University of Michigan consumer survey. Recall that in the week ending November
10, weekly initial claims rose for the third week in the past four, to 231k, a
three-month high. Continuing claims rose for the eighth consecutive week, and
at 1.865 mln, it is the most in nearly two years. A small decline in initial
claims would not surprise while the rise in continuing claims is consistent
with slower hiring. A slowing of the labor market is not just about wages, but
also demand. Note that the early forecasts for this month's nonfarm payrolls
are coming in around 175k, which, while better than the initial October
estimate of 150k, it would still see the three- and six-month averages decline.
Durable goods orders are volatile but on
average declined by 0.4% a month in Q3. Through September, durable goods orders have averaged a
0.6% gain this year, twice the average for the same 2022 period. We already
know that Boeing's orders were almost halved from September's 224, though
deliveries increased (34 vs. 37). The median forecast in Bloomberg's survey
anticipates a 3.2% decline, which would be the second steepest decline since
April 2020 (The biggest decline was July's 5.6% hit.). Excluding defense and
aircraft orders, durable goods orders are seen edging up by 0.1% after a 0.5%
gain in September.
The University of Michigan's consumer
survey may have hit peak interest when Fed Chair Powell cited a preliminary
estimate (that was later revised lower) to help explain why the central bank
decided to hike by 75 bp rather than the 50 bp it had previously signaled. The preliminary measure of the
one-year expectation and the five-to-10-year projection rose by 0.2% to 4.4%
and 3.2%. The increase runs a bit counter-intuitive given the steady decline in
average retail gasoline prices since the end of September, without fail to the
lowest level since mid-January. In early October, the two-year breakeven
(difference between the yield of the conventional two-year note and the
inflation protected security) reached six-month high near 2.35% and is now near
2.16%. The 10-year breakeven reached a seven-month high a little shy of 2.50%
in mid-October and was near 2.28% yesterday, the lowest in more than two
months.
Canada's October CPI
probably did not change any minds about anything. The 0.1% increase was expected as was the
decline to 3.0% year-over-year. The underlying core measures eased slightly.
Short-term Canadian rates were little changed. The US dollar slipped to a
three-day low near CAD1.3680. It is trading quietly inside yesterday's
(~CAD1.3680-CAD1.3730) range. The trendline that forms the lower edge of a
potential symmetrical triangle is around CAD1.3670 today, while last week's low
was closer to CAD1.3655. The greenback recovered against the Mexican
peso but only after falling to about MXN17.0660, its lowest level in
two months. It managed to rise through Monday's high (~MXN17.2530) but settled
below it, neutralizing the technical damage. It has come down from a high on
November 10 of almost MXN17.94. The dollar is consolidating quietly mostly
between MXN17.18 and MXN17.25 ahead of Mexico's September retail sales report. A
modest increase after August's 0.4% decline is expected. Still, a move now
above around MXN17.28 could signal a corrective phase and the first target is
in the MXN17.40-50 area.
Overview: The dollar remains offered and our ideas
about it stalling as central banks push against the timing and extent of the
easing the market is anticipating are being challenged. The Governor of the
Reserve Bank of Australia and the Bank of England both warned higher rates may
still be needed. Still, the momentum may be slowing. Meanwhile, the short squeeze continues to lift the Japanese
yen, which is trading at its best level in two months. The PBOC has slashed its
dollar reference rate and the yuan is near four-month highs after the greenback
gapped lower.
Interest rates are lower. The 10-year bond
yields are mostly 2-4 bp softer in Europe, and despite the anticipated EC
deficit warnings, France's premium over Germany is slightly less today and
peripheral premiums have narrowed a little. The US 10-year Treasury yield is
off nearly two basis points to 4.40%. Yesterday's 20-year Treasury auction
yesterday was well received and today, the US Treasury sells $26 bln two-year
floating rate notes and $15 bln 10-year TIPS. Equities are mixed. In Asia
Pacific Japan, China, and Hong Kong markets slipped while demand for AI-related
chip plays helped Taiwan's index to new 19-month highs. Europe's Stoxx 600 is
hovering around little changed levels, while US index futures are narrowly
mixed. The S&P and NASDAQ have five-day advances in tow coming into today. The
softer dollar and interest rates are helping lift gold, which approached $1995,
its best level since November 3. Oil prices are consolidating after rallying
more 6.3% over the past two sessions on ideas of further OPEC+ cuts that could
be announced this weekend. January WTI reached almost $78.50 yesterday and is consolidating
above $77 today.
Asia Pacific
The 10-year JGB yield near its lowest
level in two months and the yen near its best level against the dollar since
early October. Japanese
officials could not have reasonably hoped for better price action. The need to
intervene in either the foreign exchange or bond market has been reduced
dramatically. The more favorable price action, however, has not helped Prime
Minister Kishida. His public support continues to weaken. Surveys by the
largest Japanese newspapers (Yomiuri, Asahi, and Mainichi) saw support fall to
21%-25%. In the past, below 30% support makes the PM politically vulnerable.
Kishida's tax rebate, the extension of energy subsides, and support for
low-income households has not impressed Japanese voters.
The minutes from the recent meeting by the
Reserve Bank of Australia at which it lifted the overnight target rate a
quarter-of-a-point to 4.35%. It was the first hike in five months. The minutes showed official
frustration that consumer prices are not moderating quicker. The central bank
expectations inflation to return to the top of its target range in late 2025,
and this is based on assumptions of one-two more rate hikes. Separately, RBA
Governor Bullock, speaking on a conference panel argued that Australian
inflation is primarily supply driven. Yet, another hike would seem to require
further upside surprises inflation and demand. Still, the swaps and futures
market think it is more likely than not the RBA is done, and short-term rates
are little changed to slightly softer today.
The dollar fell to a low near JPY148.10
just as the US foreign exchange market from the weekend yesterday. It peaked near JPY148.70 before Europe
closed for the day, which was also the low seen in Asia on Monday.
Follow-through selling in Asia saw sent the dollar to around JPY147.15 before
stabilizing and returning to the JPY147.80 area in the European morning. There
are options for $1.15 bln at JPY147.75 that expire tomorrow. Initial resistance
is seen near JPY148.00 and then JPY148.50. The Australian dollar
extended its recovery and reached almost $0.6465 yesterday. It finished
strong and pushed slightly above $0.6585 before stalling. The 200-day moving
average is about $0.6590. The Aussie backed off to around $0.6560 before
catching a new bid Europe. The Chinese yuan has surged. It is at
its best level in nearly four months. The US dollar was near CNY7.30 on
November 13 and approached CNY7.13 today after gapping lower. This primarily
reflects the broad dollar retreat but also a flurry of action by Chinese
officials, including new fiscal support and aid to the property sector. The
PBOC lowered the dollar's reference rate for the second consecutive session. Today's
fix was almost 0.3% lower than yesterday at CNY7.1406. That is the most since
July. The average forecast in Bloomberg's survey was for CNY7.1682. Note that
the yuan's advance extended into the sixth consecutive session, the longest
streak of the year.
Europe
Europe has a light economic diary until
Thursday when the preliminary November PMI is due. We suspect the eurozone economy is
bottoming, but positive news remains elusive. The preliminary PMI is expected
to firm slightly but the manufacturing, services, and composite are seen
remaining below the 50 boom/bust level. The ECB does not meet until December
14, and no one expects a change in policy. Fiscal policy is more central this
week, following last week's German high court decision ruling against shifting
funds earmarked for Covid to the environment using its off-balance sheet funds.
Press reports suggest the EU will issue a report today critical of France's
fiscal stance, while Germany and Italy are reportedly recognized as not fully
compliant. Still, even at this late date, there seems to be no agreement on how
to reform the EU's fiscal rules, as suspension of the Stability and Growth
Agreement is to end.
Ahead of the UK's preliminary PMI on
Thursday, Chancellor the Exchequer Hunt will deliver the Autumn Statement
around midday in London tomorrow. There seems to be two key elements that people are watching
closely. First, with inflation being halved, as Prime Minister Sunak had set as
a goal at the start of the year, the troubled Tory government is looking at tax
cuts to help revive its fortune, as the Hamas-Israel conflict divides Labour.
Sunak seemed to steal some of Hunt's thunder by announcing yesterday that
"we can, and we will cut taxes." Reports suggest Hunt could
extend the "full expensing" of fixed asset investment (estimated cost
GBP10 bln a year). There is also some talk of a cut in the inheritance tax
(main rate stands at 40%). A 10-percentage point cut could cost GBP2 bln. Hunt
may announce other measures, with limited fiscal impact, which could also
support growth and investment. Second, Hunt expected to make good on a promise
to expand Individual Savings Accounts (ISA) promised earlier this year that
would allow the holding of less liquid assets, such as long-term asset fund
vehicles. Separately, Bank of England Governor Bailey pushed back against the
dovish move in the markets and warned that interest rates may have to be
increased further. The swaps market barely reacted. The odds, for example, of a
move in May, slipped to about 50% from about 56% yesterday.
The euro drew closer the $1.0960 area in
North America yesterday. That is the (61.8%) retracement of the sell-off from the mid-July
high. It reached $1.0965 in Asia before slipping back to almost $1.0940 in
early European turnover. Some buying may be options related. There are about
620 mln euros struck at $1.0930 that expire today and 1.3 bln euros at $1.0925
that expire tomorrow. Above the $1.0960 runs into psychological resistance at
$1.10. The upper Bollinger Band is near $1.0980 today and the euro settled
above it in four of the past five sessions. Sterling rose to almost
$1.2520 yesterday and follow-through buying has lifted it to almost $1.2545
today, a new high since September 11. The (50%) retracement of its
losses from the mid-July peak is near $1.2590. Initial support may be around
$1.2500-20. Separately, note that Hungary's central bank is expected to cut the
base rate by 75 bp (to 11.50%). It delivered the first cut (75 bp) in the cycle
last month. Lastly, Dutch vote tomorrow in a very close election. The main two
parties are tied, and the populist-national Freedom Party is polling one seat
behind.
America
The market showed little response to the
large decline of the index of Leading Economic Indicators since April. The last time the index rose was in
February 2022. It has fallen by an average of 0.6% a month this year. It fell
by an average of 0.5% a month last year. Today's reports include the Chicago
Fed's National Activity Index. When the US economy grew nearly 5% in Q3, this
index was flat. If it were not on Bloomberg's calendar, it might not be
noticed. The Philadelphia's Fed non-manufacturing activity (for November) also
does not typically draw much market interest. Existing home sales last rose
(and ever so slightly at that) in May. They are seen falling by 1.5% after a
nearly 2% decline in September. Late in the session, the FOMC minutes from the
meeting earlier this month will be released. Recall, that market initially took
the statement as somewhat hawkish, but as Fed Chair Powell spoke, the market
saw it as dovish. Later, when speaking on a panel at the IMF, Powell was seen
hawkish, until the softer than expected CPI (and PPI and import prices) last
week. With the implied yield of the December 2024 Fed funds futures implying
more than three rate cuts next year, the market is once again running well more
dovish than the Fed. The minutes may be a reminder that the Fed is not content
and there is still much work to be done.
Canada reports October CPI today. The median forecast in Bloomberg's
survey is for a 0.1% increase after a decline of a similar magnitude in
September. If so, that would mean Canadian CPI rose at a 1.6% annualized rate
over the past three months. Given the base effect, the year-over-year rate
could fall toward 3.0% from 3.8% in September. Recall that the low since March
2021 was set in June at 2.8%. Officials have been concerned about the lack of
downside momentum of the underlying core rates. The trimmed core rate may slip
to the lower end of the 3.6%-3.9% range it has been stuck in since April. The
weighted median fell to 3.8% in September, its low since January 2022. Another
small decline is expected.
The Canadian dollar
continues to lag. It
is the only G10 currency that has been unable to gain against the dollar here
in Q4. It is off by about 1%. The Norwegian krone is the second worst
performer, and it is virtually flat since the end of September. We are
monitoring the formation of a symmetrical triangle pattern this month. The
upper boundary is near CAD1.3820 today and the lower border is around
CAD1.3660. Last Thursday's range (~CAD1.3680-CAD1.3775) continues to contain
the price action. While the Canadian dollar struggles to get traction,
the Mexico peso continued to trend higher. It reached its best level in two
months. The greenback peaked near MXN17.94 on November 10 and traded
to almost MXN17.08 yesterday. It has edged a little lower today to almost
MXN17.0650. The measuring objective of the double top pattern forged last month
is about MXN17.00. The last time the dollar traded below MXN17.00 was September
1. Mexico's economy appears to be outperforming others in the region including
Brazil and Colombia. Chile reported a 0.3% expansion in Q3 yesterday after
contracting by as much in Q2.
Overview: Last week's dollar losses have been
extended today. The yen is leading the move, encouraged by talk of a buying by
a large US real money fund. The Dollar Index is off about 0.35% after sliding
1.8% last week. It is below the 200-day moving average for the first time since
late August. As was the case last week, the Canadian dollar is the laggard. Emerging
market currencies are also mostly higher. The Chinese yuan's 0.67% rise is the
most since late July. Notably, the greenback's losses today come despite
slightly firmer US rates. The 10-year yield is up almost three basis points to
4.46% and the two-year yield is up about couple of basis points to 4.90%.
The Nikkei reversed lower after setting a
marginal new 33-year high. Hong Kong and mainland shares that trade there led
the region led the regional advance. Europe's Stoxx 600 is edging higher after
rallying 2.8% last week. European benchmark 10-year yields are mostly a little
firmer, though Italy, where Moody's upgraded the outlook for stable, and Portuguese
bonds, where Moody's lifted the rating to A3 from Baa2 have seen yields slip by
2-3 bp today. US index futures are slightly firmer. Gold is trading with a
heavier bias today after stalling before the weekend near $1993.45. It fell to
$1973.45 today. Initial support may be near $1970. Amid talk that OPEC+ will
consider more or extended cuts to support prices is helping the January WTI
contract build on the pre-weekend recovery. It is trading near a three-day high
around $76.80. A move above there could see $78-$79.
Asia Pacific
As widely expected, Chinese banks left
their loan prime rates unchanged at 3.45% (for the one-year rate) and 4.20%
(for the five-year rate). Beijing appears to be more focused on monetary quantities than
prices. This was the takeaway from last week's benchmark one-year Medium-Term
Lending Facility. The rate was left at 2.50%, but the amount offered, CNY1.45
trillion was nearly twice October amount and well above this month's maturing
amount. This is part of the PBOC's aggressive liquidity provisions,
complementing the new fiscal efforts by Beijing, which include a CNY1 trillion
central government fiscal boost, special lending facility to help local
governments cope with the debt stress, and there were reports suggesting
another CNY1 trillion initiative to support public housing and urban renewal.
Separately, note that Beijing announced it has approved the application of
Mastercard's joint venture in China.
The idea that Taiwan's opposition could
run a single candidate captured many imaginations. It was seen easing cross-strait tensions
and reinforcing what many see as a thaw in US-China relations. However, the
attempt faltered, and Ko Wen-je, of Taiwan's People's Party, announced he will
be the presidential candidate, while the Kuomintang responded but saying that
negotiations continue. Candidates must be registered by the end of this week.
If the KMT's candidate, Hou Yu-ih runs as well, the risk is that the Democratic
Progressive Party's candidate and current vice president Lai Ching-te would win.
Today, as widely expected, Lai named Taiwan's former envoy to the US, Hsiao
Bi-khim as his running mate. She has been the de facto ambassador to the US
since 20220. Taiwan's main equity index has fallen once this month and is up
about 7.6% so far this month, through last week. The MSCI Asia Pacific Index
has risen about 6.8%. The Taiwanese dollar has appreciated by around 1.8% this
month, which is around the median for active Asia Pacific currencies and leaves
it about 3.6% lower year-to-date. In the region, outside of pegged Hong Kong
dollar, only the Indonesian rupiah (~0.50%) and Philippine peso (~0.10%) have
gained against the US dollar this year. Today, the Taiwanese dollar has traded
higher, helped by a smaller decline in exports, while the equity market eked
out a minor gain.
The dollar tested the month's low near
JPY149.20 ahead of the weekend. Some of the selling pressure may be option related. There are
options for $770 mln that expire today at JPY149.25 and almost $1.4 bln at
JPY149 that expire Thursday. Note that the five-day moving average has fallen
below the 20-day moving average for the first time since late July, which
illustrates the faltering uptrend. The low from late October was near JPY148.80
and the dollar cut through that to reach JPY148.20 in the European morning. This
is the lowest the dollar has been since October 10. Amid talk of intervention,
the dollar has recorded a low near JPY147.45 on October 3. The intraday
momentum indicators are stretched. Initial resistance is seen near
JPY149.00-20. The Australian dollar settled last week at $0.6515, its
highest closed since August 10. The Aussie recovered from a three-day
low (~$0.6455) ahead of the weekend and closed on its highs. Follow-through
buying lifted the Australian dollar through last week's highs (~$0.6540) is the
initial target to almost $0.6565. The $0.6585-$0.6600 may be more formidable
resistance, housing the (50%) retracement of the decline since mid-July and the
200-day moving average. Still, the intraday momentum indicators warn the
downside risks in North America. Initial support is seen the $0.6520-35
area. The greenback's broad decline has lifted the Chinese yuan. The
yuan is trading at its best level since early August. The fell from the
pre-weekend close near CNY7.2145 to CNY7.1640. The PBOC set the dollar's
reference rate at the strongest in nearly three-months today (CNY7.1612). The
average projection in Bloomberg's survey was for CNY7.2335. It is the fifth
consecutive session that the yuan has risen and today gain about 0.67% is the
most since late July.
Europe
With Eurostat confirming that the eurozone
economy contracting by 0.1% in Q3, today's news that construction output in
September rose by 0.4% after August's 1.1% decline shrugged off by the market. This week's calendar is light ahead of
Thursday's preliminary November PMI. The PMI is seen stabilizing but at poor
weak levels consistent with contracting activity. ECB officials have pushed
back against speculation of a rate cut in Q2 24. The swaps market has about 76%
chance of a cut discounted for April 2024, and 35 bp of cuts by the end of Q2
23.
Ahead of the weekend, Moody's offered good
news to Italy. Moody's
maintained it Baa3 rating sovereign credit rating, one step above junk, which
is a notch lower than S&P and Fitch. However, it revised its outlook for
stable from negative. The market is not surprised. Italy's 10-year yield fell
by 21 bp last week to about 4.36%. It settled last month near 4.80%. Italy's
premium over Germany reached a nine-month high in early October, a little above
205 bp. Last week, it fell to almost 170 bp, the lowest in two months.
The euro posted an outside up day before
the weekend, trading on both sides of Thursday's range and settling above
Thursday's high. Indeed,
the euro settled at its highest level (~$1.0915) since August 30. The high from
late August was about $1.0945, and the euro reached $1.0940 in early European
turnover. The (61.8%) retracement of the drop from the year's high set in
mid-July is found near $1.0960. In the CFTC reporting week that ended November
14, speculators in the futures market grew their net long euro position for the
fifth consecutive week. At 108.9k contracts, it is the largest net long
position in two months. The bulls added 8.7k contracts to their gross long
position, the most since mid-July. The bears covered 11.1k contracts, in the
sixth consecutive week of short covering. Sterling also posted an
outside up day ahead of the weekend and also settled near its session
high. Last week's high was near $1.2505, its best level since
mid-September. Sterling reached $1.2510 today and has held above the 200-day
moving average (~$1.2445). The next target is the (50%) retracement of its
decline since the July high found near $1.2590. But momentum is has faltered in
Europe and a test on the lows looks likely in North America. In the futures
market, speculators have their largest net short sterling position (~27.7k
contracts) since mid-January. Speculators were net long sterling futures from
mid-April to until mid-October and have been net short since then.
America
While every business cycle is unique, this
one is especially so. There
have been many economic and financial indicators that seemed to signal a
recession. Among these is the index of Leading Economic Indicators. It has not
risen since February 2022. The six-month rate of change is at levels that were
associated with recession conditions in the past. That said, it bottomed in
March at -9.0% and has steadily improved to -6.7% in September. Despite the
improvement, it is still consistent with an economic contraction. The past six
recessions were declared with an average annualized six-month LEI decline of
about 5.9%.
Fed Chair Powell observed that the Summary
of Economic Projections are a snapshot of what officials are thinking at the
time, and they become dated as the quarter progresses. Fair enough. Although Powell says it is
too early to talk about rate cuts, it is not entirely true. The September dot
plot pointed to two cuts in 2024 and June iteration pointed to four cuts (after
two increases). The market now has about a 77% chance of the first cut in May
2024. The CME's FedWatch
tool says that current pricing is consistent with about a 30% chance
of 100 bp cut next year and a 26% chance of 75 bp reduction. In this
holiday-shortened week for the US, only Richmond Fed President Barkin is due to
speak (today at 12:00 ET on Fox Business). Barkin, a non-voting member of the
FOMC this year, does get the vote next year. While Barkin has said that more
work may need to be done to curb demand and inflation, he seems to be in no
hurry to move again.
Canada reports October CPI and the
government will provide its fall economic update tomorrow. Before the weekend Canada reported that
foreign investors sold a net C$15.1 bln of Canadian bonds and stocks in
September. It was the first back-to-back divestment since June-July 2020. In
Q3, foreign investors sold about C$10 bln of Canadian securities. It edged out
Q4 18, to be the largest quarterly net liquidation by foreign investors since
2007. Canada's October CPI is expected (median forecast in Bloomberg's survey)
to have risen by 0.1% after falling by the same amount in September. The base
effect points to a decline in the year-over-year rate to about 3.1% from 3.8%.
The underlying core measures may have slipped slightly. The swaps market has
the first Bank of Canada rate cut fully discounted by the end Q2 24.
The US dollar traded inside
Thursday's range (~CAD1.3680-CAD1.3775) ahead of the weekend. Initial support is seen near last week's
low (~CAD1.3655). The low for the month was set on November 6 (~CAD1.3630). The
line connecting these two lows is around CAD1.3665 today and about CAD1.3680 at
the end of the week. The price action seems to be consistent with the possible
forging a larger topping pattern and a convincing move below the recent lows
would lend greater credence to this constructive technical case for the
Canadian dollar. The US dollar snapped a five-day slide against the Mexican
peso before the weekend but only after slipping briefly below MXN17.19, its
lowest level since September 25. The dollar has been sold to
MXN17.1530 today but the momentum is stalling. The key data point this
week may be the CPI for the first half of November. The headline rate is
expected to firm slightly, while the year-over-year core rate has scope to slip
a little. Milei won the Argentina presidential run-off. The most liquid
offshore bonds firmed in the European morning today. In the parallel markets,
the peso fell by about 8% yesterday. Local markets are closed today.
The combination of
soft US price data and mostly weaker economic data lends credence to a new
economic convergence. The economic news stream from Europe, Japan, and China is
not particular inspiring. Rather the convergence is driven by the materialism
of the long-anticipated slowdown of the world's largest economy. This new
convergence is negative for the dollar. Our conservative working hypothesis
continues to be that the US dollar's gains from the middle of July are being
retraced. While we suspect that more than just a technical correction is
unfolding, given the high degree of uncertainty and the uniqueness of the
post-Covid business cycle, prudence dictates taking it one step at a time.
The near-term risk is that the market has gotten ahead
of itself. The US data are likely to confirm a sharp slowdown at the start of
Q4, but the market is pricing in nearly four rates cuts by the Federal Reserve,
with around a 75% chance the first one is in next May. It is difficult to
anticipate the pendulum of expectations swinging more in that direction without more encouragement. Fed
officials (and central bankers) may lean against what might be seen as
premature easing of financial conditions. Outside of the preliminary PMI, the
highlights in what will be a holiday-shortened week for the US, are the UK's
Autumn Budget and Canada's CPI. Japan reports its October CPI, but Tokyo's data
a few weeks ago steals its thunder. The oil prices have declined for four
consecutive weeks, taking crude down around 12.5%. The correlation between
changes in oil prices and interest rates/breakevens, is not particularly robust.
Still, if the drop in oil is sustained, and it appears to be helping depress
average retail gasoline prices (in the US), there could be more significant
knock-on effects.
United States: After almost 5% annualized growth in Q3, the world's largest economy is
going to slow in Q4, and the key issue question is the magnitude. The median
forecast in Bloomberg's monthly survey is for a 0.7% expansion on an annualized
basis. Fed Chair Powell was spot-on with his observation that the Summary of
Economic projections are simply snapshot of official thinking and that as the
quarter progresses, the views become dated with new information. Recall that in
December 2022, the median forecast by Fed officials was that the economy was
going to grow by 0.4% this year. It has been steadily lifted and in September
stood at 2.1%. Yet, the US economy has grown by that much through the first
three quarters. Following a slowing of job growth in October and weaker retail
sales and industrial production, the data in the holiday-shortened week ahead
should show more softness.
Existing home sales are expected to have fallen for
the fifth consecutive month in October. Durable goods orders are seen falling
(~3.4%). It would be the third decline in four months. Note that Boeing's
orders slowed to a still strong 119 in October from 224 in September. Its
backlog of orders reached 4,578 planes, worth about $440 bln, and that was
before the latest announcement of new orders from Middle Eastern airlines (~94
planes). The October Leading Economic Indicator Index has been falling without
fail beginning April 2022. The six-month annualized decline has been moderating
since March (-9.0%) to -6.7% in September and this trend may have continued,
albeit slightly in October. The University of Michigan updates is November
survey that showed a rise to 4.4% of the one-year inflation expectations, up
from 4.2% in October and 3.2% in September. Fed officials seem to put more
stock in the 5-10-year expectations. They rose to 3.2% in the initial estimate
up from 3.0% and a new high since 2008. The NY Fed's survey showed one-year
consumer inflation expectations slipped to 3.57% in October from 3.67% in
September. It is a three-month low. The three-year expectation was unchanged at
3.0%. The three-year breakeven (difference between inflation-linked security
yield and the conventional yield) is about 2.2% and the one-year breakeven is
around 2.12% (vs. 2.23% at the end of October). The one-year breakeven is near
2.07% (vs.2.25% at the end of October).
The US also sees the preliminary PMI at the end of the
week. The readings are holding slightly above the 50 boom/bust level. The
composite was at 50.7 in October, a three-month high. It has been below 50
since January. Lastly, recall that the market initially saw the FOMC statement
earlier this month as hawkish but then interpreted the Fed Chair as dovish.
This seemed to be a stretch to us at the time, and, in any event, the market corrected itself
after Powell's comments at an IMF discussion, as if that is where a change
would be announced. Still, the Fed's stance seems straigth-forward: Policy is restrictive,
but it is not clear whether it is restrictive enough. The Fed is prepared to
raise rates again, if necessary. The market judges it will not be necessary.
The futures market has a little more than almost a 75% chance that the first rate
cut will be delivered in May 2024, and it has 92 bp in cuts priced in for all
next year. That is three quarter-point cuts and a 70% chance of a fourth rate
reduction.
The Dollar Index fell by more than 1.7% last week, its
largest decline in four months. It repeatedly tested the 104.00 level since
November 14 CPI report and finally broke through it ahead of the weekend. The low was slightly above 103.80. The
next area of technical support is seen around 103.45-103.60. We suspect it may
head toward 102.55, the (61.8%) retracement of the rally since the mid-July low
(~99.60) to the early October high (~107.35). Resistance may be encountered in
the 104.50 area.
China: Without
a cut in the one-year Medium-Term Lending Facility (MLF) rate last week,
Chinese banks seem to be under little pressure to reduce their prime rates. In
fact, recall that following August's 15 bp reduction in the MLF rate (to
2.50%), the one-year loan prime rate was cut by 10 bp (to 3.45%), while the
five-year loan prime rate has been steady at 4.20%. Still, the PBOC offered
CNY1.45 trillion (~$200 bln) through the MLF, which is more than double the
amount of funds coming due this month. Some argue that this injection is roughly
the equivalent of a 25 bp cut in reserve requirements. Next week, the PBOC will
issue CNY45 bln (~$6.2 bln) in T-bills in HK. This may absorb some of the
excess liquidity and support the yuan. Reports suggest that ahead of Biden-Xi
meeting, China's buyers, including Sinograin, bought 3 mln metric tons of
soybean in almost a dozen agreements struck. US beans are more expensive than
Brazil's, but these beans may be headed for storage. With less moisture and
lower oil content, US beans may store better. Other reports suggest China is
considering buying Boeing's 737 Max airplane. On the other hand, the day before
the heads of state meeting, the main US federal government pension fund
announced that it would adopt a new benchmark which excludes Hong Kong, in
addition to China, which had previously been dropped.
The yuan's 1% gain last week was the most in in four
months. The dollar peaked in September near CNY7.35 and approached CNY7.2050
ahead of the weekend, its lowest level since mid-August. A break below CNY7.19
could signal a move toward CNY7.10-12. The rolling 30-day correlation between
changes in the yen and offshore yuan reached a new high for the year near 0.69
ahead of the weekend. The 60-day correlation is near 0.57 and the high for the
year was set in April closer to 0.60. The correlation between changes in the
euro and offshore yuan are firm though lower than the yen.
Japan: Japan's
CPI will draw media attention and headline traders, but the new information is
very limited. The Tokyo CPI that was reported on October 27 is the signal. What
it is telling us is that the national measure most likely rose again. The
headline rate may rise from 3.0% toward 3.4%. The core measure, which excludes
fresh food, may have risen to 3.0% from 2.8%. The measure that excludes fresh
food and energy was unchanged in Tokyo (3.8%), while the national measure was
at 4.2% in September. Bank of Japan Governor Ueda is putting more weight on
wages. This year's spring wage round produced an average base pay gain of
3.99%, the most in 30 years. Yet, real household spending s 2.8% lower
year-over-year in September. It has not been positive since October 2022. The
weakness of the yen and the end of the pandemic has seen tourist flock to
Japan. Tourism last month surpassed tourism in October 2019. Tourists from
South Korea were up three-fold from October 2019, while visitors from Taiwan,
Singapore and the US surpassed the trips pre-pandemic too. Chinese tourists
were the largest before the pandemic and were off by around 65% last month from
pre-pandemic levels.
The dollar returned to this month's low near JPY149.20
ahead of the weekend. Falling US rates and a short squeeze in the JGB market
seemed to be the key drivers. The 10-year (generic) JGB yield was slightly
above 0.97% at the start of the month, and, at the end of last week, spiked to
about 0.72%, the lowest since late September. The five-day moving average
(~JPY150.75) has not traded below the 20-day moving average (~JPY150.50) since
the end of July. A crossover now could be a proxy for moving average crossover systems
behind some model-driven segments. Below JPY149.20 is the low from late October
(~JPY148.80) for intermittent support ahead of JPY148.00.
Eurozone:
We suspect the eurozone economy is bottoming out. It does not mean that there
are strong growth impulses, but the drip feed of poor economic news may be
ending. The main report in the week ahead will be the flash PMI. The readings
are so weak that it will likely take a several months for the composite (46.5
in October) to recover above the 50 boom/bust level. The market has almost a
90% chance that the ECB delivers its first cut in April 2024, and nearly a 90%
chance that three cuts are delivered by the end of Q3 24. The market did not
punish Spain for the political uncertainty following the July elections and the
reaction was muted when Sanchez secured his third term as prime minister. The
price will be greater dependence on the Catalan separatist. Portugal is in a
somewhat different position. A corruption probe has toppled the Costa
government and an election will be held in March 2024. The 10-year yields in
Portugal and Spain fell by 17-18 bp last week, seeing their premium over
Germany narrow by around five basis points. Lastly, we note that Moody's upgraded the outlook for Italy's credit to stable and affirmed its lowest
of investment grade status. The 10-year Italian bond yield fell 20 bp last week.
The eurog pushed to $1.0915 at the end of
last week, its best level since the end of August. The next upside target is
the high from late August around $1.0945 and the (61.8%) retracement of the
decline from the mid-July high (~$1.1275) that is found near $1.0960. Momentum
indicators are rising but getting stretched. Initial support has formed around
$1.0825. Better support may be found closer to $1.08, which holds the
200-day moving average and the (38.2%) retracement of the rally from the
November 10 low (~$1.0655).
United Kingdom:
The UK Chancellor of the Exchequer Hunt presents the Autumn Statement on fiscal
policy on November 22. There appears to be pressure from the Tories to allow
fully expensing (deducting from taxable profits) investment in machinery and
buildings, which Hunt estimates will cost the government GBP10 bln. Hunt has
also promised to address labor supply and build on the 30 hours of free
childcare announced in the Spring Budget. The Tories continue to trail behind
Labour by a wide margin. The UK must hold an election by the end of January
2025, and many expect it to be called late next year. The UK also sees its
preliminary November PMI. The composite fell back below 50 in August and has
not been able to resurface the threshold. The UK economy stagnated in Q3 and
the median forecast in Bloomberg's monthly survey look for stagnation to
continue this quarter and next. After stronger jobs growth and softer
inflation, the UK reported a disappointing 0.3% decline in October retail sales
ahead of the weekend. The swaps market is pricing about a 55% chance of a cut
next May and it has two rate cuts fully discounted by the end of Q3 24.
Sterling had a good week, rising by about 1.5% against
the dollar, but it was front-loaded. The high for the week was set on Tuesday
after the US CPI a little above $1.25, its best level in two months. It
consolidated lower in the second half of the week mostly between
$1.2375-$1.2460. The momentum indicators suggest there may more near-term
upside potential. Last week, sterling met the (38.2%) retracement objective of
the sell-off since the mid-July high (~$1.3140) found near $1.2460. The next
retracement (50%) is near $1.2590. A break of $1.2350 would be disappointing,
while falling below $1.2300 would suggest the upside correction might be
over.
Canada: There
are three highlights in the week ahead. First is the October CPI on November
21. The base effect suggests the headline rate may ease back toward 3.3%.
Recall that it bottomed in June at 2.8% and rebounded to 4.0% in August before
slipping to 3.8% in September. Canada's CPI rose at an annualized rate of about
3.6% in Q3 after 4.8% in Q2 and 5.2% in Q1. The Bank of Canada puts an emphasis
on the underlying trimmed and median core rates and has expressed concern about
the lack of progress in recent months. The trimmed mean has been chopping
between 3.6% and 3.9% since May, while the median core rate has been 3.8%-4.1%.
Second, a few hours later, the Canadian government will provide its fall
economic update. It might not be market-sensitive in itself but the Bank of
Canada recently suggested that the fiscal policies of the federal government
and provinces may be contributing to the inflation challenge. Third, at the end
of the week, Canada reports September retail sales. Consumption slowed sharply
in Q3, rising by only 0.2% (seasonally adjusted annual rate) after Canadian
consumer splurged in Q2 (4.7%). August's 0.1% decline in retail sales probably
overstated the case and small gain is likely.
The Canadian dollar was the weakest of the G10
currencies last week, with around a 0.6% gain. The yen, which was the second
weakest, rose 1.25%. The Canadian dollar often lags in a soft US dollar
environment. Still, we suspect the greenback is carving out a topping pattern
against the Canadian dollar. If this is to remain a valid working hypothesis,
the US dollar needs to hold below the CAD1.38 area. The momentum indicators are
trending lower and the five-day moving average (~CAD1.3730) is below the 20-day
moving average (CAD1.3770). On the downside, it would ideally close below
CAD1.3675 at the end of the week ahead.
Australia: The
minutes from this month's central bank meeting, which decided to lift the
target rate for the first time since June will be published on November 21. It
was the first hike under the leadership of Governor Bullock. The swaps and
futures market still have the risk of another hike discounted. The preliminary
November PMI will reveal whether October's decline in the composite to a new
low for the year (47.6) noise or the signal. There are two other developments
to note. First, it looks increasingly unlikely that Australia will conclude
free-trade agreements with either the UK or the eurozone until at least well
into next year. Second, the center-left government announced it would scrap
more than 50 rail and road infrastructure projects due to cost overruns and
fears, underscored by the IMF, that significant infrastructure spending
threatened to worsen price pressures. The government may project new funding
for infrastructure in its mid-year economic review expected in the coming
weeks, while pursuing a 50/50 split with state governments.
The Australian dollar had a good week, gaining
slightly more than 2.4% on the greenback to reach its best level in three
months. It was the third consecutive week that the Aussie has had a net change
of 2% or more. It has not done this since August-September 2021. The Australian
dollar peaked in the middle of last week near $0.6540 and spent the last two
sessions consolidating. It found support ahead of $0.6450. Around $0.6510, the
Aussie met the (38.2%) retracement of the decline from the mid-July high
(~$0.6900). The next retracement (50%) is about $0.6585, and the 200-day day
moving average is a little higher (~$0.6595). The momentum indicators are
rising but getting stretched.
Mexico: The initial estimate that Q3 GDP rose by 0.9% quarter-over-quarter is
subject to revision, but it makes the September retail sales report on November
22 somewhat less important for the market. The CPI for the first half of
November is more interesting. We note that the pace of improvement appears to
be slowing. A few hours after the CPI report, minutes from November 9 central
bank meeting will provide some more insight into how officials are thinking
about the economy. Recall that the statement after the meeting modified the
language around how long the overnight target will be kept at 11.25% from
"a long time" to "some time". The central bank also trimmed
its inflation forecast to an average of 4.4% in Q4 23 (from 4.7%) and 4.3% in
Q1 24 (from 4.4%). Separately, Argentina's run-off presidential election is on
November 19. Regardless of the results, Argentina's economy is in a difficult
place, with triple-digit inflation, over-indebted, and low international
reserves. A large devaluation seems nearly unavoidable.
The greenback reached almost MXN17.94 on November 10,
reversed lower and recorded a low near MXN17.19 at the end of last week. After
settling lower for five consecutive sessions, the dollar eked out a small gain
before the weekend. The momentum indicators are still falling, and chart
support is not seen until MXN17.00-10. Initial resistance may be around MXN17.
35.
Overview: The Japanese yen is leading the
charge against the dollar today. Short covering in the Japanese bond market,
the decline in US rates, and some reports of real money saw the dollar tumble
to around JPY149.25 to approach the low for the month near JPY149.20. All the G10
currencies are firmer today, as are all but a few emerging market currencies. The
Dollar Index finished October near 106.55 and it has been finding support near
104.00 in recent days. A break targets the 103.00-50. Benchmark 10-year yields
are lower. In Europe, yields are mostly 7-8 bp lower. Disappointing UK retail
sales has pushed 10-year Gilt yields 10 bp lower. Italian bonds are
participating fully in rally even though Moody's rating update is due later
today. The US 10-year yield is pushing below 4.40%.
The poor news stream from
Alibaba, another casualty in the US-China chip war, weighed on Hong Kong shares
and mainland shares that trade there, but the reginal performance was mixed.
Not so in Europe, where the Stoxx 600 is up over 1% to bring this week's rise
to almost 3%. US index futures are firm. The S&P 500 is up 2.1% coming into
today to put the finishing touches on its third consecutive weekly advance. The
NASDAQ is up 2.3% this week so far and its three-week rally has lifted the
benchmark by more than 11%. The softer dollar and rates are bolstering gold. The
yellow metal is above $1990, up about 2.7% this week. January WTI has
stabilized after yesterday's 4.8% slide. It fell to nearly $72.35 yesterday and
is approaching $74 today.
Asia Pacific
The light economic calendar
today provides an opportunity to summarize this week's key developments in the
region. In terms of
economic data, four points stand out. First, Japan's economy contracted more
than expected in Q3 (2.1% annualized) and the deflator rose (5.1% from 3.5%). Consumption
was flat after falling 0.9% in Q2. Second, China reported weak October lending,
though there was reportedly a surge in bond issuance. The property sector
continues to suck wind, while the economic recovery remains unsatisfactory. Third,
Australia's labor market has slowed, and in the four months through October,
has lost nearly 30k full-time jobs. The 3.7% unemployment rate is the upper end
of where it has been over the past 18 months. The 67% participation rate
matches the record high. Fourth, South Korea's memory ship exports increased in
October for the first time in 16 months. Overall, South Korea's exports rose
for the first time this year. In terms of political developments, Xi's meeting
with Biden and Kishida, the first such bilateral meetings in a year was the
highlight, but news that the opposition parties in Taiwan have agreed to run a
single candidate (which will be decided over the weekend) could have far
reaching implications for January's election and cross-strait relations.
The pullback in US rates
reinforced the sense that the dollar is toppish near JPY152.00. The greenback has been sold to around
JPY149.25 and is approaching the low for the month near JPY149.20. There had
not been much reaction to BOJ Governor Ueda's comment there were advantages and
disadvantages of a weak yen. Deputy Finance Minister Akazawa told the Diet that
there is not specific exchange-rate level for intervention, which is aimed at
"excess volatility." Reports suggest short covering in Japanese bond
market and real money demand for yen. The 10-year yield spiked down to 0.72%,
its lowest since mid-September. The 10-year yield was near 0.90% on Monday.
Note that the lower Bollinger Band is near JPY149, and the greenback has not
traded below it in four months. That said, a loss of JPY148 would encourage
talk of a dollar top. The Australian dollar spent yesterday consolidating
the nearly two-cent rally scored this week. It tested the (38.2%)
retracement objective of the gains off last Friday's low (~$0.6340) found
around $0.6465. It made a marginal new low slightly above $0.6450 and found a
bid that lifted it back above $0.6500. On Wednesday, the Aussie saw $0.6540,
its best level since mid-August. The technical outlook is constructive, and the
Aussie can work its way back up to the $0.6585-$0.6600, which houses the
200-day moving average and the (50%) retracement target of the sell-off since
the mid-July high near $0.6900. The Chinese yuan is also rising on the back
of the broadly weaker US dollar. The yuan is at its best level since
mid-August. The dollar, which was pushing against CNY7.30 at the start of the
week is now closer to CNY7.23. If chart support is meaningful in this highly
managed currency pair, it may be near CNY7.20. For the first time in several
weeks, the PBOC set the dollar's reference rate slightly weaker (CNY7.1728 vs.
CNY7.1724). The average in Bloomberg's survey was for CNY7.25 (vs. CNY7.2453
yesterday). It is the fourth consecutive session that the yuan has
strengthened. This week's gain of about 0.7% is the most in about two
months.
Europe
Eurozone data in recent days
have not changed the outlook substantively. The economy contracted by 0.1% in Q3, and economic impulses
are weak. Economists expect a stagnant performance this quarter, which might be
a tad optimistic. The swaps market has 80% chance that the first rate cut will
be delivered in April. A week ago, the odds were a little below 70%. The US and
EU remain unable to find a way past the Trump-imposed steel and aluminum
tariffs. The US has proposed "Plan B" to extend the status quo
through the end of 2025, which is a truce struck last year (after recriminating
tariffs on ~10% of the bilateral trade) and expires at the end of next month. That
truce replaced US tariffs with "tariff-rate quotas" and Europe froze all
its measures. The status quo then favors the US, it appears. Rather than
quarterly quota, Europe is seeking annual thresholds and a US commitment to
retain a liberal exclusion stance. Separately, Germany's high court ruled
against the government's off-budget funding to address climate change, which
could call into question this other such funding vehicles.
It has been a busy week in
the UK. Home Secretary
Braverman has the ignoble distinction of being fired twice--once by then Prime
Minister Truss and again last week by Sunak. Sunak had not only resurrected
Braverman a year ago, but he has brought back former Prime Minister Cameron as
foreign secretary. In terms of economic data, the UK reported a somewhat
stronger than job growth and stickier average weekly earnings and softer than
expected October CPI (4.6%, down from 6.7% in September) and year-over-year
declines producer prices. Today, the UK reported an unexpected 0.3% fall in
retail sales (volume) after September's decline was revised to -1.1% from
-0.9%. Excluding gasoline, retail sales slipped 0.1%. Still, the decline in
retail sales was broad-based. Reports indicated that all retail sectors
experienced a decline in sales but non-store retailers and "other
stores". Alongside gasoline, the slump in household goods was noted. The
swaps market is discounting around a 70% chance that the Bank of England cuts
rates next May. That is up from about 20% at the end of last week.
The euro recorded a marginal
new high of almost $1.09 yesterday. It
has not traded above there since the end of August. The $1.0860 area
corresponds to the (50%) retracement objective of the decline from the year's
high set in mid-July near $1.1275. The next retracement (61.8%) is closer to
$1.0960. Still, after closing above its upper Bollinger Band for the past two
sessions, the euro settled back inside it (~$1.0865). It fell to $1.0825 in
late Asia/early European activity but rallied to new session highs in Europe
near $1.0875. After stalling slightly above $1.25 on Tuesday and
Wednesday, sterling set back to almost $1.2375 yesterday before catching a bid and settled back near $1.2420. It retested the low today before
recovering to $1.2430. While sterling has retraced (38.2%) of its decline since
the mid-July high (~$1.3140), the next retracement (50%) is near $1.2590. It
had settled above the upper Bollinger Band on Tuesday but move back within it
on Wednesday and remained inside yesterday. The upper band is near $1.2495
today.
America
The US reported softer than
expected October CPI, PPI, and industrial output, while the decline in headline
retail sales was a little less than expected and September's increase was
revised slightly higher. Continuing
jobless claims rose for the eighth consecutive week to reach a two-year high,
while initial claims at their highest level since August. The much-awaited
Biden-Xi meeting agreed to renew military communication and China pledged to
crackdown on fentanyl. The partial government shutdown has been averted, or
more accurately, spending authorization was extended into Q1 24. Separately,
the Biden administration's "Indo-Pacific Economic Framework" was dealt a significant
setback at the hands of fellow Democrats. The IPEF was not enthusiastically
embraced by US allies as it did not offer access to the US market. Still, many
seemed surprised that it was dropped for domestic political considerations,
while the war in Israel jeopardizes the pipeline that was supposed to be an
alternative to China's Belt-Road Initiative.
The data drove US rates
sharply lower. The
10-year yield plunged more than 25 bp this week, the most in four months. After
probing the 5% threshold in late October, the yield slipped slightly below
4.38% today. The two-year yield, which peaked near 5.25% on October 19, reached
almost 4.79%. The implied yield of the December 2024 Fed funds futures is about
4.43%, down from 4.69% a week ago, which implies three rate cuts and nearly 2/3
of a chance of a fourth cut.
The greenback rose to almost
CAD1.3780 to meet the (61.8%) retracement of the losses from last Friday's high
near CAD1.3855. Some
attributed the Canadian dollar's weakness to the nearly 5.5% slump in crude
(WTI) prices, which followed a 2% decline on Wednesday amid rising US
inventories. Still, the correlation between changes in the exchange rate and
oil prices is less than 0.25 and is at the low end of this year's range. We
also note that the New Zealand dollar fell more than the Canadian dollar and
the Australian dollar was lost nearly as much. On the other hand, the weakest
of the G10 currencies was the Norwegian krone. The greenback has pulled back to
around CAD1.3720 today. A close below CAD1.3700 would weaken the technical
tone. The US dollar fell to new lows since late September against the
Mexican peso, near MXN17.22 yesterday and follow-through selling today has seen
it approach MXN17.19. Lower US rates, the recovery of emerging market
currencies in general, and the falling out of favor of the Colombia peso after
the unexpectedly weak GDP figures on Wednesday may have helped Mexico
outperform. The objective of the double top pattern carved out in October near
MXN18.50 is closer to MXN17.00. As the peso has recovered, implied volatility
has fallen. Three-month vol peaked in early October near 14.6% and has slipped
below 12% to near the 200-day moving average (~11.8%).
Talking Points:
An important day for the New Zealand Dollar this week as markets await the Reserve Bank of New Zealand’s Official Cash Rate announcement, RBNZ Monetary Policy Statement, RBNZ Rate Statement, and RBNZ Press Conference, the current official cash rate is 5.50% and the forecast is the same. It is not expected that RBNZ will take a different path with interest rate hikes that are different from other major central banks.
The available data as of the latest RBNZ meeting reflects a slower economy and a weaker labor market. The data released from China which has a high impact on New Zealand continued to show that the economy is struggling, with the manufacturing sector extending its contraction and the non-manufacturing sector slowing. A slowing economy and declining inflation are not supportive factors for raising rates.
Weekly Chart Analysis
Source: Tradingview.com
Commitment of Traders – COT – Traders in Financial Markets – TIFF Report – As of November 24th, 2023
Source: Cotbase.com
Important Trading Considerations for all NZD Pairs
Traders who are familiar with New Zealand Dollar trading usually need to consider a few points:
Read more: NZD/USD eyes RBNZ rate meeting
