Greenback Consolidates Two-Day Surge

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Greenback Consolidates Two-Day Surge

Overview: The US dollar is consolidating its the
two-day surge since the jobs data at the end of last week. The Reserve Bank of
Australia did not rule out additional rate hikes, and although the derivatives
markets do not think it is likely, the Australian dollar is the best performer
in the G10 today with a small gain. An unexpectedly strong German factory
orders report failed to help the euro much and it languished near yesterday's
low. Sterling finally broke out of its $1.26-$1.28 range and is also moving
sideways in a roughly $1.2530-65 range.

Signs that Chinese officials are stepping
up their support for the equities saw the CSI 300 jump around 3. 5% and the
Hang Seng surged by a little more than 4%. Among the large markets, Japan,
South Korea, and Australia fell. Europe Stoxx 600 is flat to firmer and US
index futures are narrowly mixed. European benchmark 10-year yields are mostly
around a basis point higher, while the US 10-year Treasury yield is practically
flat near 4.16% and the two-year yield is off a couple of basis points to 4.54%.
The US quarterly refunding begins today with $54 bln three-year notes on sale. Gold
is consolidating in a narrow range around $2025, yesterday's settlement. March
WTI is trading quietly in the upper end of yesterday's range near $73.

Asia Pacific

It seems more than ironic that so many
observers have underscored the problems of China's real estate market, which
indeed is real, while the US commercial real estate woes drove down the US
regional bank share index by 7.2% last week alone, the most in eight months. At the same time, China is faulted for
weak consumption, though on a per capita basis it has more than doubled in the
past ten years and (according to their figures rose 7.2% in 2023), while
Japan's household spending has fallen for the past five years, including, as we
learned earlier today a 2.5% decline in December on a year-over-year basis (vs.
-2.0% median forecast in Bloomberg's survey). On a month-over-month basis,
household spending fell by 0. 9%. One of the factors that is depressing
Japanese household spending is the wages have not kept pace with inflation. Real
labor earnings have also fallen for five consecutive years, including the 1.9%
year-over-year decline reported earlier today for December 2023 (-1.5%
expected). Excluding bonuses and overtime, base pay rose 2% year-over-year.

As widely expected, the Reserve Bank of
Australia left is cash target rate unchanged at 4.35%. Despite the weakening of the economy and
moderating price pressures, it was too early to reverse last November's
quarter-point hike. In fact, the RBA kept the door ajar to further tightening. The
updated forecast show that officials expect core inflation to return to the
midpoint of the 2%-3.0% target range in 2026 (trimmed mean measure was at 4.2%
in Q4 23). The market sees a later start and a less aggressive path of RBA
easing than most of the G10 central banks. The futures market now has the first
cut fully discounted in September, but has it almost priced in for August. The
market now is pricing in about 50 bp of cuts this year down from almost 70 bp
at the end of last year.

The dollar set a new high for the year in
North America yesterday near JPY148.90. It has held below JPY148. 80 today. We had seen resistance
near JPY149.20. The 10-year US Treasury yield has risen by around 37 bp since
the post-FOMC low last Thursday (4. 80%). It has approached 4. 20%, which
capped it last month. Similarly, the two-year yield spiked to 4. 48% last month.
We thought the high could be closer to 4.55%. Lower US yields today have seen
the greenback consolidate. It has held above JPY148.35. Initial support is
near JPY148.25 and then around JPY147.70. The Australian dollar was sold
to about $0. 6470 near the end of the European session yesterday, which took
out the lower Bollinger Band (~$0.6485). It settled slightly in the band. We
saw chart support closer to $0.6450. The Aussie recovered to about $0.6520,
stopping shy of yesterday's high near $0.6525. We suspect North American
participants will try again. The Chinese yuan is trading higher for the
first time in three sessions, helped by the dollar's broader stability and s
sharp jump in Chinese 10-year bond yield (six basis points, the most in seven
months, to 2. 45%) and a surge in equities. A Chinese sovereign wealth fund
indicating it would expand the range of its equity holdings and ETFs. The PBOC
set the dollar's reference rate at CNY7.1082 (CNY7.1070 yesterday). The
average in Bloomberg's survey was for CNY7.2025 (CNY7.2053 yesterday).

Europe

Aggregate eurozone retail sales fell by 1.1% in December and were off 0.8% year-over-year. It was the second consecutive decline in
the monthly reading, while the year-over-year reading has not been positive
since September 2022. It was in line with expectations after Germany
disappointed with a 1.6% drop (the median forecast in Bloomberg's survey was
for a 0.6% gain, though note that what was a November collapse of 2.5% was
revised to -0,8%. Separately, the smallish 0.3% increase in November was
revised away but German factory orders were surged by 8.9% in December. Major
orders were the key, without which orders would have fallen by 2.2%, but they
seemed to be widespread. Domestic orders jumped 9. 4% and foreign orders by 8.5%,
with eurozone orders surging by 34.5%. The eurozone orders were largely for
capital equipment (72.3% increase), while domestic orders for intermediate
goods rose by 14.7% and by 12.8% for consumer goods. This may have supported
industrial production, which is due tomorrow. German industrial output has not
increased since last April. Germany's manufacturing PMI has been below 50 since
June 2022, but the pace of contraction has slowed. Last month, it weas at 45.5,
reflecting six months of improvement from 38.8 last July. Still, with Q4 23
GDP out in late January (-0.3% quarter-over-quarter) the factory orders and
industrial production data might not be adding much to the information set of
market participants and policymakers.

The euro took out the December low
yesterday by 1/100 of a cent, according to Bloomberg. It settled below its lower Bollinger Band
(~$1.0760) for the first time since last October. It recovered into the
Bollinger Band (~$1.0735) but has slipped below it in the European morning. A
break of $1.0700 would target the $1.0660 area initially and then the $1.06
area. However, with stretched intraday momentum indicators, we look for the
euro to consolidate and show a firmer profile in North America today. Sterling
finally and convincingly broke out of the two-cent trading range that framed
the price action since mid-December. It reached roughly $1.2520 before
exhausting the immediate selling pressure. That met the (38.2%) retracement
objective of the Q4 23 rally. We peg initial support near $1.2500. The next
retracement (50%), though, is near $1.2430. It settled below the 200-day
moving average for the first time since mid-November, and well below the lower
Bollinger Band ($1.26). It is still below the Bollinger Band (~$1.2570) and
was stopped near the 200-day moving average ($1.2565).

America

The Fed's Powell has repeatedly explained
that while there is a single number that captures inflation (PCE deflator), it
is more difficult to quantify full employment. For that, the Fed looks at several
measures. Some who continue to play up the risk that the US is in a recession
or headed for one were not dissuaded by the January employment report. Nevertheless,
the broader context would seem to concur with the Fed's assessment that
"Job gains have moderated since early last year but remain strong, and the
unemployment rate has remained low." Seemingly underscoring that point
was the jump in the ISM services employment sub-index to 50.5 from a revised
43.8 in December.

Four regional Fed officials
are scheduled to speak today, but Cleveland Fed's Mester is the only voter this
year on the FOMC (the others are Kashkari, Collins, and Harker). Tomorrow, Governors Kugler and Bowman
speak. Richmond Fed's Barkin, who votes on the FOMC this year, will also speak.
Boston Fed's Collins also speaks again. Meanwhile, the US Treasury's quarterly
refunding kicks off with $54 bln three-year notes. We suspect that the more
than 25 bp backing up of rates since the end of last year will help facilitate
a smooth auction. Given the $65 bln 10-year maturities that on February 15,
including almost $20 bln at the Fed, Wednesday's $42 bln 10-year note auction
may also be taken up. It is the $25 bln, 30-year bond auction on Thursday that
may be the most difficult. There is no maturing issue this quarter. The results
may reflect the appetite to increase duration.

The US dollar made a marginal new high for
the year against the Canadian dollar is it rose a couple of hundredths of a
cent above the January high to reach almost CAD1.3545. The upper Bollinger Band was frayed (~CAD1.3540), it settled on it. Today, it comes in closer to CAD1. 3555. The next
upside target is the CAD1.3600-25 area. Canada reports December building
permits and the Ivey PMI. Neither will likely outweigh the general risk
appetite and broad movement of the US dollar on the exchange rate. The US
dollar found support in early European turnover in front of CAD1.3500. The
greenback held slightly below last week's high against the Mexican peso (~MXN17.2855) and reversed lower yesterday. It fell to MXN17.0875, which was the
lowest it has been since the initial reaction to the US employment data before
the weekend. It made a marginal new low in the early European turnover near
MXN17.0755. Recall that last week's low was near MXN17.0380. Only the Mexican
peso and n ruble, among emerging market currencies, managed to rise
against the US dollar yesterday. On Thursday, Mexico report January CPI a few
hours before the central bank meets. The overnight rate is seen steady at 11.25%,
making the combination of carry and relatively low volatility attractive.

Disclaimer

Source: Greenback Consolidates Two-Day Surge