Started by PocketOption, Feb 20, 2024, 06:25 pm
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Overview: The foreign exchange market isbecalmed today, with most of the major pairs trading in narrow ranges. Theeconomic calendar is light and the North American session features benchmarkrevisions in US CPI and Canada's January employment figures. The US quarterlyrefunding supply has been absorbed without much fanfare. The dollar-bloccurrencies and the Norwegian krone are firmer today. A bank forecast that thecentral bank will hike rates later this month is lifting the New Zealand dollarto new highs for the week near $0.6150. Emerging market currencies are narrowlymixed today. Most of the freely accessible emerging market currencies arelower, including the South African rand, Hungarian forint, and Turkishlira.
Japanese equities were mixed, and the HangSeng slipped in the abbreviated session ahead of the holiday. Mainland sharesthat trade there were off almost 1%. Other large markets in the region settledhigher. Europe's Stoxx 600 is slightly firmer after closed lower in the pasttwo sessions. US index futures have a slightly upside bias after the S&Pand Nasdaq set new record highs yesterday. The 10-year Japanese government bondyield rose a couple of basis points to 0.71%, a marginal new high for the week.European yields are also slightly firmer and setting the week's high today. Thesame is true for the 10-year US Treasury yield, which is posting above 4.16%. Goldis in a narrow $5 range above $2030. It settled slightly below $2040 last week.March WTI is extending its recovery into the fifth consecutive session. Aftertumbling by almost 7.4% last week, it is up nearly 5.7% this week. It istrading near $76.40 after setting a low on Monday around $71.40.
It is not just that the dollar is strong,but the Japanese yen is also weak. Valuation in the foreign exchange market does not seem to matterunless it is extreme. According to the OECD's model of purchasing power parity,which is not the final word, but a useful metric that has a long history, theyen is around 56% undervalued against the dollar. When the G5 met in the PlazaHotel (1985) to coordinate intervention to drive the dollar lower (and theGerman mark and Japanese yen higher), in a highwater mark of coordination, theyen was about 25% undervalued, according to the OECD. According to the Bank forInternational Settlements calculation of real equilibrium exchange rates theyen is more undervalued than the Chinese yuan, but one would not know that. Ironically,similar arguments and tactics, including export restrictions used against Japanin the 1980s and 1990s are now deployed against China.
Sometimes, when two series appearcorrelated, like the number of mortuaries and the number of churches in a city,it is because they are correlated to a third factor, in this case populationsize. Despite obviousdifferences, one common characteristic of the (offshore) yuan and yen is thatboth have low interest rates and are attractive funding currencies. AlthoughJapan runs a trade deficit and China, a surplus, both record current accountsurpluses. Japan's is around 3.4% of GDP and China reports a current accountsurplus half has large in proportionate terms. Some critics argue China'scurrent account surplus is larger than officially acknowledge, and even so,countries with current account surpluses often have lower rates than deficitcountries. Given the managed nature of the yuan's exchange rate, astabilization and recovery of the yen would likely facilitate a stronger yuan.
With the mainland markets closed now untilFebruary 19, the lurch lower by the yen might be a limited drag on the offshoreyuan. Although theoffshore yuan is not limited by the 2% band against the dollar off the onshoreyuan, it is mostly respected. Given that yesterday's fix was at CNY7.1063, itsuggests that the dollar will likely trade mostly between about CNH6.9640 andCNH7.2485. It is little changed today, inside yesterday's range.
The BOJ's deputy governor commentsyesterday and the rise in US rates has sparked a new leg up in the dollar andthe move does not seem complete. The comments appeared to have been reiterated by BOJ GovernorUeda, who also played down the likelihood of a tightening cycle even after arate adjustment. The dollar made a marginal new high today near JPY149.60,about 10 pips higher than yesterday, and found support ahead of JPY149.20. Interms of the intervention escalation ladder, so far not a peep, but theprobability of one is increasing. This is the sixth consecutive week, thedollar has risen against the yen, the longest advance in a year. Still,one-month implied volatility is at approaching 8%, its lowest since lastNovember. Japanese officials may want to slow the depreciation of the yen asthe JPY150 psychological level is approached. There are nearly $1.4 bln inoptions struck there that expire next Tuesday, shortly after the US JanuaryCPI. After being turned back near $0.6540 on Wednesday, the Australiandollar has struggled to sustain even modest upticks. It tested support inNorth America yesterday and nearly returned to the week's low set Monday near$0.6470, around where the lower Bollinger Band is found. The Aussie is tradingquietly today inside yesterday's range. It is in less than a 15-tick range oneither side of $0.6500.
The eurozone goes into the weekend amidlight news developments and next week's economic calendar highlight is anotherlook at Q4 GDP and its details. The market impact should be minimal. A key issue that emerged isrenewed economic divergence with the US economy appearing to grow faster thantrend, while Europe stagnates or worse. One implication is that the ECB is seenlikely to cut rates before the Federal Reserve. That said, the odds of an AprilECB rate cut have fallen to about 55% from nearly 75% at the end of last week. Meanwhile,the odds of a Fed cut in May has slipped below 75%, which is the least in morethan two months. The swaps market has about 118 bp of ECB cuts this yearcompared with about 115 bp the Fed.
The UK's economic calendar empty today butnext week is important with a new employment report, January CPI and PPI,December GDP and details, and Q4 23 GDP. The labor market is slowing, and the base effect warns ofan uptick in the year-over-year rate of UK CPI, but the real story is the sharpslowing of UK inflation in the February-May period. Net-net, the monthly GDPfigures show an economy that stagnated in October and November and likely didnot do much better in December. The swaps market has about an 72% chance of acut in June (down from 100% at the end of last week). It is fully discounted inAugust. There are three quarter-point cuts fully discounted and about a 20%chance of a fourth cut this year (or roughly 80 bp).
The euro briefly traded below Wednesday'slow in North America yesterday, falling to almost $1.0740 before recovering. It approached the session high set in AsiaPacific turnover on Thursday a little below $1.0790, which is more or lesswhere it settled last week. It is also the (38.2%) retracement of the drop fromthe $1.09 level it approached before the jobs data. The single currency is anexceptionally narrow range today (~$1.0760-$1.0785). With the momentumindicators stretched and the euro down for five of the six weeks to start theyear, we look for some kind of reversal pattern to suggest a bottom is in place. Sterling,like the euro, is nearly flat on the week. It did close twice below$1.26, the bottom of the multiweek trading but recovered and closed back intothe range in last two sessions. Still, sterling has stalled in front ofWednesday's high near $1.2640. It is in about a third of a cent range todayabove $1.2600, that has been approached in the European morning. There areoptions for about GBP330 mln at $1.2560 that expire today. Yesterday's low wasalmost $1.2570.
Economists will digest the implications oftoday's CPI revisions, but we suspect the impact on the market and policymakerswill be minimal. At hisrecent press conference, Fed Chair Powell said that officials will review therevisions, but he did not seem to put much weight on them. After a quiet weekof economic reports, the week ahead will be richer. Headline January CPI mayhave dipped below 3% on a year-over-year basis for the first time since Q1 21.The core rate is seen slipping to 3.7% from 3.9%. After going on shopping spreein December, boosting retail sales by 0.6% (headline) and 0.8% (core/control),the US consumption likely was tempered in January. Industrial output contractedin Q4 23, but likely began the new year on a firm note. The 0.4% increase thatthe median forecast in Bloomberg's survey anticipates, would be the strongestsince last July.
Canada's January employment report is thehighlight of today's North American session. Canada lost full-time positions in two of the last threemonths. In 2023, Canada fill 324.2k full-time positions, of which 33k were inQ4 23. The unemployment rate, which was at 5.0% as recently as last April,finished the year at 5.8% and may have ticked up again last month. Net-net, theparticipation rate was flat last year at 65.4%. The problem for the Bank ofCanada is wages. The hourly wage rate for permanent employees increased 5.7%year-over-year in December. This was a new cyclical high and well above the3.4% CPI. The market does not have the first Bank of Canada rate cut discounteduntil July (thought there is about 2/3 chance of a hike in June), according tothe swaps market. Canada's inflation is likely to fall sharply in the comingmonths as the strong increases in the first part of last year (6.3% annualizedrate in the Jan-Apr 2023) drop out of the 12-month comparison.
The US dollar drifted lower against theCanadian dollar yesterday. Itsettled below the 20-day moving (~CAD1.3460) for the first time since the USjobs data. The greenback recorded a new low for the week, slightly belowCAD1.3450, which is the (50%) retracement of the rally that began in the middleof last week. The greenback is pinned near yesterday's low and has notbeen much above CAD1.3465 today. Mexico's central bank laid thegroundwork for a cut as early as next month. This confirms what hadalready seemed priced into the swaps market. The peso was sold, and the dollarset session highs in the hour following Banxico's announcement near MXN17.17.It reached almost MXN17.50 in early European turnover, but the dollar was soldto nearly MXN17.12. Initial support is seen near MXN17.10 ahead of the week'slow slightly above MXN17.00. Other Latam currencies, but the Colombian pesoweakened yesterday and the Mexican peso's loss (~.55%) was in line with theBrazilian real (-0.50%).
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