After extending its gains, the Greenback softens

The US Dollar is seeing this week’s gains pared against most of the G10 currencies today. The Australian dollar has recovered from a two-week low set earlier today and is the only G10 currency that has gained on the greenback this week. The Reserve Bank of Australia raised rates earlier this week and the market has brought forward its expectation for another hike. The dollar’s gains this week seemed to be largely technical in nature as the correction to the sharp losses from mid- to late January are retraced. The momentum indicators warn the upside correction may have more room to run. 

US January jobs report was due today, but another government shutdown delays it until next week. Canada reports its jobs figures today, but the policy impact is minimal as the Bank of Canada seen on a long hold. The US 2-10-year yield curve is above 70 bp, the steepest in four years, and is drawing attention. Japan votes this weekend, and the Prime Minister Takaichi’s LDP looks set to expand its support. Thailand also votes this weekend.

Prices  

G10

The euro spent yesterday in an almost 25-tick range on either side of $1.1800. Options for 3.7 bln euros expire there today after 3.4 bln euro options expired there yesterday. The euro was sold to a two-week low earlier today, near $1.1765 before recovering to probe $1.18 io Europe. The momentum indicators warn that the downside correction is probably not complete. 

The dollar took out the previous session high against the yen for the fifth consecutive session yesterday. The greenback reached almost JPY157.35, its best level since January 23 and the rate-check by US officials. The dollar barely slipped through yesterday’s low (~JPY156.65) before recovering back to JPY157, where there are about $810 mln in options that today. It settled near JPY154.80 at the end of last week.

A combination of a dovish hold by the Bank of England and new knocks on Prime Minister Starmer saw sterling tumble more than a cent for the first time in three months. It lost the most to the euro (~0.75%) since last August. Sterling overshot the (61.8%) retracement objective of its run-up from the January 19 low (~$1.3330) to the last week’s high (~$1.3870) that is found near $1.3535. It was sold to a two-week low near $1.3510 today before catching a bid that saw it recover to about $1.3580. The 20-day moving average is about $1.3575. Near-term risk extends to $1.3600-20, though the momentum indicators have only just turned lower. 

The US dollar settled above CAD1.3700 yesterday for the first time in nearly two weeks. That area corresponded to the (50%) retracement of the decline since the middle of last month. Follow-through buying lifted it to CAD1.3725 today. Options for almost $700 mln at CAD1.3700 expire today. The next retracement target and 20-day moving average are in the $1.3750-60 area. However, dollar is reversing lower and has been sold to session lows in the European morning slightly below CAD1.3680. Yesterday’s low was near CAD1.3655 and a break of it would help stabilize the Canadian dollar’s tone. 

The Australian dollar fell to a three-day low yesterday near $0.6940. It has completely unwound the gains registered in the wake of Tuesday’s rate hike. Today, it took out Monday’s low (~ $0.6910) and frayed the $0.6900 level, where options for almost A$3 bln are struck at $0.6900 that expire Monday and Tuesday next week. The Aussie has rebounded to almost $0.6980. Yesterday’s high was a little above $0.7005. A close above it would lift the technical tone. 

EM

The Mexican peso barely reacted to yesterday’s decision by Banxico to leave its overnight target rate at 7.0% and seemed to signal an extended pause. The dollar settled near MXN17.5075 yesterday and rose to MXN17.5660 today before dollar sellers made a stand and sent the greenback through MXN17.34. Yesterday’s low was a touch below MXN17.30. The US dollar settled last week near MXN17.46. 

The PBOC set the dollar’s fix higher for the second consecutive session today for the third time this year. Today’s reference rate was set at CNY6.9590 after CNY6.9570 yesterday and CNY6.9678 a week ago. The offshore yuan is in a narrow range as the greenback remains in its recent trough. The dollar is near CNH6.9370 and settled last week around CNH6.9585.

The Reserve Bank of India stood pat and the dollar recovered to trade into the gap created by Tuesday’s sharply lower opening. The greenback reached INR90.8550 today. It settled near INR91.99 a week ago. A shelf has been forged in recent days near INR90.00.

Other markets

The steep losses in US equities yesterday weighed on Asia Pacific markets today. Outside of Japan and India, the large bourses tumbled. Europe’s Stoxx 600, with less tech exposure, is up around 0.3% after losing 1% yesterday. US index futures are 0.3%-0.6% higher.

Benchmark 10-year yields are mostly lower today. Japan’s 10-year yield slipped almost 1 bp and yields are 2-3 bp lower in Europe. The 10-year US Treasury yield is firmer but below 4.20%. It is off about eight basis points this week. 

After initial follow-through selling in Asia, gold and silver have reversed higher. Gold was sold to almost $4655 and is now back to nearly $4890. Silver spiked to almost $64, a low since mid-December but rebounded and is now near $75.

March WTI is consolidating between around $62.30 and $64.60 as the market awaits news on the US-Iran talks. It settled near $65.20 a week ago. 

Data

The US was supposed to release the January jobs report today, but the government shutdown interrupted the schedule (again). That leaves the preliminary February University of Michigan consumer survey as the only economic report of the day. Sentiment may have slipped after improving for the past two months, while the inflation expectations could be stable at January levels: 4.0% and 3.3% for the 1-year and 5-10-year projections, respectively. 

Canada will provide its monthly update on the labor market. After full-time positions jumped 51.4 k in December, it is difficult to anticipate a repeat in January. The unemployment rate is seen steady at 6.8%. With the Bank of Canada seen to be on an extended hold, the policy implications are negligible, even if the report poses headline risk. 

On the heels of the 7.8% surge in Germany’s December factory orders reported yesterday, the strongest in couple of years, Germany reported an unexpected 1.9% drop in industrial output. The orders were heavily weighted to domestic customers, but the December trade surplus, also reported today, was larger than expected at 17.1 bln euros, bolstered by a 4% increase in exports. 

Japan reported disappointing December household spending. It was a whopping 2.6% lower than a year ago. The median forecast in Bloomberg’s survey was for a 0.3% decline. Japan holds the lower house election on Sunday, and polls show the LDP with a chance to recapture a majority. In the past, maintained its alliance with the Komeito Party even though there were times that it might not have been politically necessary. We suspect this will be the case with its new alliance partner, Japan’s Innovation Party. 

Thailand holds its general election Sunday, and the fragmented nature of its political climate warns that it may take some time to form the next government. There is also a yes/no referendum on the desire for constitutional reform.