by Marc Chandler
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Overview: On the back of lower interest rates, the greenback's slide was extended in early Asia Pacific turnover, but it has recovered. As North American trading begins, the dollar is firmer against all the G10 currencies but the New Zealand dollar, which has been aided by the hawkish hold of the central bank, and an immaterial gain in the Swiss franc. Emerging market currencies are mixed. Central European currencies and the Mexican peso are softer. The Chinese yuan reached its best level since June. The greenback's recover is seeing gold reverse after reaching a near high a little above $2050.
Many of the large equity markets in the Asia Pacific region fell, including Japan, Hong Kong, China, and South Korea. India's 1% gain leads the others. Europe's Stoxx 600 is rising for the first time this week. US index futures are also trading with a firmer bias. Interest rates are softer. The 10-year JGB yield is near 0.66%, having peaking near 0.95%. European benchmark yields are mostly 4-7 bp lower, though UK Gilts are underperforming. The 10-year US Treasury yield is off 2.5 bp to slightly below 4.30%. The US two-year yield is down around three basis points to 4.70%. Lastly, January WTI is extending yesterday's recovery, with the help of an estimated decline in US inventories. January WTI is trading near a four-day high slightly below $77.50.
Asia Pacific
Australia's October CPI slowed to 4.9% from 5.6%, a sharper decline that expected. The central bank meets next Tuesday, and, after this month's hike, it was widely recognized that it would stand pat. Still, Australia's two-year yield is off nearly 13 bp today to about 4.10%, the lowest since early October. Separately, the Reserve Bank of New Zealand delivered a hawkish hold. The cash rate was left at 5.50%, but its revised projections show a bias toward another hike, and no cut until mid-2025. The New Zealand dollar initially rallied more than 1% on the news (to almost $0.6210), but amid broader corrective pressures, unwound most of the gains, but is still firmer against the US dollar for the fifth consecutive session.
Tomorrow, China reports November PMI and a small uptick is expected amid new official efforts to support the economy. More working days in November after the October holiday also favors an uptick. Better Taiwan, South Korea, and Hong Kong exports to China may also suggest some traction. On the other hand, the decline in demand from oil refiners has been a drag on prices. Japan reports October retail sales and industrial output. Recall that September retail sales were initially reported as -0.1% but were revised to 0.4%. A similar rise is expected in October. Industrial output rose 0.5% in September after falling by 0.7% in August and tumbling 1.8% in July. The median forecast in Bloomberg's survey looks for a 0.8% increase, which would be sufficient to lift the year-over-year rate back into the black after contracting in Q3. Upticks in retail sales and industrial production would lend credence to ideas that the Japanese economy is returning to growth after contracting by 2.1% in Q3. Lastly, India will report Q3 GDP. India's economy is slowing from the 7.8% year-over-year pace in Q2 to around 6.5% in Q3. The risk seems to be on the upside as the industrial sector more than makes up for the slowing of agriculture.
Pressed by the sharp drop in US interest rates, yesterday the dollar approached the low set last week near JPY147.15, and follow-through selling today took it to almost JPY146.65. The greenback recovered to session highs near JPY147.80 in European turnover despite the soft US rates. It stalled and may consolidatein North America. The Australian dollar's surge extended into a fifth session today, reaching $0.6675 before the softer-than-expected CPI, which helped fuel some profit-taking. It was sold to around $0.6620. The Aussie has risen in nine of the past 12 sessions and met the (61.8%) retracement from the $0.6900-high in July found near $0.6665. A break, and especially a close below, yesterday's low slightly below $0.6600 would be a cautionary development, warning that this month's rally, from almost $0.6300 may be over. The dollar gapped lower against the Chinese yuan, reaching nearly CNY7.1175, a five-month low, before recovering to around CNY7.1280. Yesterday's low was close to CNY7.1345. The PBOC set the dollar's reference rate at CNY7.1031 (CNY7.1132 yesterday). The average projection in Bloomberg's survey was CNY7.1334.
Europe
Germany and Spain reported their figures today. German states reported softer inflation and the national estimate it due shortly. The EU harmonized measure is expected to fall for the second consecutive month and bring the year-over-year rate to 2.5% from 3.0%. That would be the lowest since June 2021. Spain's harmonized measure eased by 0.6%, which pushed the year-over-year rate to 3.2% from 3.5%. The eurozone aggregate measure is due tomorrow and is expected to fall by 0.2%, which would see the year-over-year rate ease to 2.7% from 2.9%. The median forecast in Bloomberg's survey has the core rate falling to 3.9% from 4.2%. It peaked at 5.7% in March.
While some American economists talk about the immaculate decline in inflation (without lifting unemployment), it may not be such a miracle. Europe is experiencing the same thing. It reports October unemployment tomorrow Despite the tightening of monetary policy and economic stagnation, unemployment in the eurozone has been 6.4%-6.5% since March. Before Covid struck, the eurozone’s unemployment rate was 7.5%. Germany reports November employment tomorrow and the unemployment rate has risen to 5.8% this year from 5.5% at the end of last year. Before the pandemic, Germany's unemployment rate was steady at 5.0%. Separately, Spain reported October retail sales today (4.5% year-over-year vs. 6.1% in September) while German figures are due tomorrow. Many economists are looking for the first increase in five months.
The euro rallied into the European close yesterday and follow-through buying lifted the single currency to almost $1.1010. Marginal new highs were seen today (slightly above $1.1015) before reversing lower. It is trading near $1.0970 in European turnover. Below there, nearby support is in the $1.0940-60 area. Yesterday's low was near $1.0935. Consistent with the euro's rise, the US two-year premium has fallen by 25 bp this month to mid-September levels. It has steadied today. Sterling pushed slightly above $1.2730 today and met the (61.8%) retracement of its decline from the mid-July high before profit-taking hit. Sterling was sold back to about $1.2675. Support is seen in the $1.2640-60 area. The upper Bollinger Band is around $1.2735 today. The intraday momentum indicators were oversold as European activity began and sterling found new bids.
America
The sharp drop in US rates likely contributed to the weak reception at yesterday's $39 bln sale of seven-year note sales. Although several Fed officials spoke, it was Governor Waller's comments that seemed to spark the dramatic move lower in US interest rates, but they pushed on a door that was already open. Waller did not appear to say anything the market did not already know but he did provide a timeframe of lower inflation for 4-5 months that could get the Fed to cut, which dovetailed with what the futures market was discounted. The odds of a hike next month were near zero before and are a smidgeon closer to it now. The first cut is now fully discounted for May from almost 58% chance at the close Monday. The implied yield of the December 2024 Fed funds futures contract is about 4.34% implying bp almost 100 bp of cuts next year. Based on the current information set, this seem to be aggressive. Nearly all the Fed officials have commented on the uncertainty of policy is sufficiently restrictive, and forecasts are for solid jobs report on December 8 (~175k increase in nonfarm payroll and a 0.3% increase in average hourly pay). Fed Chair Powell speaks twice on Friday.
The US Treasury is done with new coupon issuance until December 11 when it returns with three- and 10-year offerings. The data on tap today are not typically market movers: October inventories and preliminary estimate of US merchandise trade, and revisions to Q3 GDP. Still, retail inventories are rising at a faster rate. The median's forecast (Bloomberg) for a 0.6% rise would raise the three-month moving average to a little more than 0.8% compared with slightly more than 0.5% in the previous three months. In the year ago period, the average was around 0.2%. Wholesale inventories were drawn down from March through August and rose by 0.2% in September and are seen rising by the same in October. Recall that inventories bolstered Q3 GDP by about 1.3 percentage points. Net exports contributed almost 2.8 percentage points to Q3 GDP. The nominal goods balance is expected to be little changed in October from September $85.8 bln shortfall. The revisions to Q3 GDP are expected to be minor. The median forecast in Bloomberg's survey sees it being lifted to 5.0% from 4.9%. That brings us to the Fed's Beige Book that is prepared for next month's FOMC meeting. Look for anecdotal evidence that the economy is moderating and some easing of the labor market. It may be seen as lending credence to the prior conviction that the Fed's tightening cycle is over.
Canada's Q3 current account balance is expected to have posted a small surplus (~CAD1 bln) after four quarters of deficits. In Q3, it recorded a merchandise trade surplus of nearly CAD2.5 bln. In Q2, the merchandise trade deficit was about CAD7.1 bln. More market sensitive data is out over the next two days. Tomorrow sees September and Q3 GDP estimate. A flat September report would be the third consecutive month it has stagnated. Still, with a little bit of luck, the economy may have eked out growth of 0.1% in Q3 after a 0.2% contraction in Q2. On Friday, Canada updates the employment situation for November. Canada created 17.5k jobs in October but lost full-time positions (3.3k) for the first time since May. Its unemployment rate has trended higher from 5.0% from December 2022 through April 2023 to 5.7% in October. The participation rate, 65.6% is unchanged since April.
The greenback's weakness is now proving sufficient to buoy the Canadian dollar. The Loonie saw its best level since early October. The US dollar fell to about CAD1.3540 today before recovering to around CAD1.3595 area. A sustained break of CAD1.3600 is potentially significant from a technical perspective. The greenback settled below its lower Bollinger Band yesterday (~CAD1.3580). The intraday momentum indicators are stretched by the greenback's recover. Banxico issues its inflation report today and it is possible the Deputy Governor Heath let the proverbial cat of out of the bag by recently suggesting that a rate cut could be delivered in Q1 24. On Monday, the US dollar made a low near MXN17.0350, but outside of this exception, it remains within the range set on November 21: ~MXN17.0660-MXN17.2690. The peso is the best performing Latam currency this month (~5.2%), but among emerging markets, excluding Russa, Poland leads (~6.40%), followed by Czech and Hungary (~5.0%).
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