The Greenback Remains Soggy, while China and Turkey Move in Opposite Directions

Overview: In quiet turnover, Asia Pacific and European equities are trading lower, while US shares are enjoying a firmer bias. China and Hong Kong markets bucked the trend. The Dow Jones Stoxx 600 is off by about 0.40% in late morning turnover. The S&P 500 has a five-week rally in tow. Bond yields are mostly 2-4 basis points higher in Europe, though the 10-year Gilt yield is up 6 bp to 81 bp. The 10-year US Treasury is pushing above 1.90%. The dollar is on its back foot after slipping against nearly all the major currencies last week. The euro poked above $1.12 for the first time since August. The JP Morgan Emerging Markets Currency Index is extending its rally into a sixth session, the longest run in five months. The South African rand is a notable exception, falling about 0.25% against the greenback. After slipping ahead of the weekend, gold is pushing higher again. It is near $1515. It finished last month, below $1465. Oil is firm with February WTI hovering just below $62 a barrel.

Asia Pacific

Over the weekend, the PBOC announced that it was pushing ahead with boosting the significance of the loan prime rate (LPR). Starting next month, new variable rate loans will no longer use the one-year lending rate but the LPR. In itself, this is not so important, as this has reportedly primarily been the case in recent months. More suggestive is the from March to August next year, the existing stock of loans will be converted to the LPR. However, the change may not result in lower rates for residential mortgages, for whom officials do not want to overly encouraging. Mortgage lending appears to account for about 25% of the CNY157 trillion of outstanding bank loans. The one-year LPR is set monthly based on one-year lending rates offered by 18 banks to their best customers, and in this respect, may be seen as a step toward liberalization, but we would not want to exaggerate this. It is at 4.15%, 20 bp below the one-year lending rate (which has been at 4.35% for four years) and is an ease on the margin, but it seems more about solidifying the role of the LPR.

South Korea reported disappointing November industrial output. It fell 0.5% on the month, compared with a flat report expected by the median forecast in the Bloomberg survey. It was the third monthly decline in the past four. The year-over-year decline moderated to -0.3% after a revised -2.1% contraction in October (initially was -2.5%).

Japanese markets will be closed for the rest of the week. The dollar had been meeting a wall of offers in the JPY109.70 area this month and as recently as Boxing Day. In the thin activity, it broke down to almost JPY109 in Asia and steadied in the quiet European morning. Initial resistance is now pegged in the JPY109.20-JPY109.30 area. More important support is seen in the JPY108.40-JPY108.70 area. The Australian dollar is testing the $0.7000-level for the first time in five months. The intraday technical readings are stretched, and the upper Bollinger Band is found near $0.6985. The Chinese yuan firmed on the back of the broadly weaker greenback. The dollar is new two-week lows near CNY6.9865.

Europe

Turkey announced a hike in reserve requirements for foreign currency deposits by 200 bp. The goal appears to be reducing the pressure on the lira. Deposits with no maturity or within one year see the reserve requirement raised to 19% and 15% for longer-term deposits. The central bank estimates that nearly $3 bln foreign currency liquidity will be withdrawn. Although the US dollar has been broadly weaker lately, it rose against the lira for the fifth consecutive week through December 27 and is near its best level in seven months.

Italy's government confirmed intentions to sell its majority stake (68.2%) in Monte Paschi in 2021. The troubled lender also announced it had sold another 1.8 bln euros of bad loans to bring this year's sales to 3.8 bln euros. Since the August lows, an index of Italian bank shares has rallied more than a third to reach the best levels since September 2018.

The euro extended its pre-weekend rally and traded above $1.12 in Asia for the first time in four months. It has straddled the level in Europe but appears to be poised to move higher. The next chart points are found in the $1.1225-$1.1235 area. For the record, it was near $1.1445 a year ago. Sterling is firm as it continues to recover from the post-election profit-taking that saw it slide from $1.35 to nearly $1.29. It rose to $1.3125 today, and the $1.3140 area corresponds to the (38.2%) retracement of the post-election drop. Initial support is seen near $1.3085 now.

America

The US economic diary is full today, but the lack of participation may limit the market's reaction. The November goods balance deficit and (wholesale and retail) inventories will be helpful for economists forecasting Q4 GDP. The December Chicago PMI and the Dallas Fed's manufacturing survey may help shape expectations for the national purchases managers manufacturing survey (PMI and ISM) out toward the end of the week. The next big report is December jobs, which will be reported on January 10. The early call is for about a 165k increase in non-farm payrolls or about 100k less than the November increase.

The Federal Reserve conducts its last term repo operation of the year today. The previous three were undersubscribed. There is still some pressure in the system for the turn, but it seems within the ranges that are regarded as normal. The Financial Times reports on how some bank practices have evolved, such as the use of "total return swaps" and encouraging clients to use "sponsored repos," that are centrally cleared.

The US dollar lost about 0.35% against the Canadian dollar before the weekend to CAD1.3065. It remains in its trough today. The low from late October is a bit lower near CAD1.3045, which itself was a three-month low. Rising commodity prices, especially oil, risk-on sentiment, and a small premium offered by Canada over the US on two-year money have helped underpin the Canadian dollar. It is the strongest of the major currencies this year, gaining above 4.35% against the US dollar. Meanwhile, the greenback flirted with the MXN18.80 level for the first time in seven months. The dollar's low for the year was seen just below MXN18.75 in March. Initial resistance is seen near MXN18.85.