The US dollar's upside correction that began before the weekend has
been extended in Asia and Europe today. The main exception is
the Japanese yen. The yen's modest gains have been registered
despite the firmness in US rates and continued advance in equities; both
factors associated with a weaker Japanese currency.
It seems two other considerations are offsetting the traditional
drivers. First, there is unwinding of long euro short yen positions
that had been established. The euro had rallied from JPY132 in the middle
of December to nearly JPY136.65 at the end of last week before posting a
bearish shooting star candlestick pattern. It is now nearing chart
support seen near JPY134.35-JPY134.45, which corresponds to a 50% retracement
of the three-week rally, the 20-day moving average, and previous congestion.
The second consideration today is the BOJ's decision to reduce the buying
of long-dated bonds (10-25 years) by JPY10 bln to JPY190 bln. It is
the first reduction since 2016. The BOJ's yield curve targeting strategy
has required it to buy few JGBs that the JPY80 trillion declaratory
objective. This seems more like a technical adjustment that a substantive
policy change. Many who look for the BOJ to adjust policy this year
anticipate a higher target for the 10-year JGB.
There was another important announcement in Asia. It was from
the PBOC and it regards how the yuan's reference rate is set. Last year,
officials had introduced a "counter-cyclical" component to ostensibly
dampen the volatility and downside pressure. Previously the
"fix" was said to be determined by the previous day's close,
subsequent movement against a basket of currencies and this counter-cyclical
element that was meant to offset sentiment and "herd" behavior.
This added an unknown (that could not be quantified) into the mix, making the
process less transparent, but apparently giving officials the tool to resist
market pressure. Officials said that the
"counter-cyclical" component has been dropped.
The way the announcement read suggested that the new policy had already
been implemented, and in any event, the yuan weakened. It dollar
approached its lowest level in four months yesterday before rallying, posting
what appears to be a key reversal, and extended those gains today. The US
dollar rose a little more than 0.33% against the yuan today, the most in
two-months. The yuan appreciated 6.75% against the dollar last year
and reserves have been gradually rebuilt over the past 11 months.
Moreover, important trade issues with the US will come to the fore in the
coming weeks, and leaving aside economic and financial influences, it ought not
be surprising if China seeks to stabilize the yuan and not give what some may
see as a concession to the US by allowing it to accrue whatever advantage there
may be in a weaker currency.
The economic data from the eurozone are constructive today, but that has
not stood in the way of an extension of the euro's losses. The
eurozone reported November unemployment slipped to 8.7% from 8.8%. It
stood at 9.8% in November 2016. Many economists are forecasting that the
unemployment rate will fall to 8.0% by the end of the year. Separately,
Germany reported November industrial output jumped 3.4%, or nearly twice what
the market expected, and lifting the year-over-year rate to 5.6% from a revised
2.8%. It is the strongest reading in six years. The output of
investment goods rose 5.7%, while consumer goods production rose
3.6%. Perhaps tying both of the news items together is that Germany’s
IG Metall union (representing 3.9 mln workers) will begin negotiations today,
seeking a 6% pay increase and more flexible hours.
The euro began the Asian session quietly after the downside momentum
appeared to ease in North America yesterday. By late in Asia and
early Europe, the euro came under modest selling pressure that brought it
toward the lower end of the band of support we identified yesterday in the
$1.1920-$1.1950 area. We suspect that the euro must to be
sold through $1.19 to signal something more important from a technical
perspective, and probably the $1.1860 are to be convincing, especially given
how deeply-rooted the bearish sentiment toward the dollar. At the same
time, we note that the non-commercials (speculators) in the futures market had
a record net and gross long euro position as of last Tuesday.
Sterling slipped to a three-day low in Europe, perhaps in response to the
soft BRC sales figures. However, it remains in the $1.35-$1.36 range.
Between the less-than-inspiring cabinet reshuffle yesterday and the BRC figures
today, which showed a strong increase in food sales but a decline in non-food
sales, would have seemed like sufficient incentive to sell sterling, but
instead it has strengthened against the euro and traded essentially flat
against the US dollar. May's cabinet reshuffle was successfully resisted
by the Minister of Health, while the Education Minister quit rather than take a
Canada's surveys (senior loan officer and business outlook) reported
yesterday reinforce speculation that the Bank of Canada will hike rates next
week. The surveys follow the stellar jobs report and are the last
important data point ahead of next week's meeting. The OIS suggests that
odds of a hike have essentially doubled since the end of last year (from 45% to
nearly 88%). The US dollar was sold to CAD1.2355 before the weekend from
near CAD1.26 at the end of last year. It consolidated yesterday and is
inside yesterday's range today. The US dollar may encounter
resistance near CAD1.2485, around where it was trading before the strong
Canadian employment data.