Overview: The reversal in US equities yesterday set the tone for today. Among the large bourses, only Hong Kong escaped the pain today.It was the sixth session of the past seven that the MSCI Asia Pacific Index fell. Today's 1.3% retreat in the Stoxx 600 brings it lower for the week, and third consecutive weekly loss. US indices closed on their lows yesterday so the lower opening that the futures point to would at least initially leave gaps on the charts. Falling equities are helping push yields lower. The US 10-year, which tested 1.90% two days ago, is near 1.79%. European yields are 2-3 bp lower. Australia and New Zealand benchmarks played catch-up and were off 6-7 bp today. The US is broadly mixed. The dollar-bloc currencies and sterling (after a dismal retail sales report) are weaker, while the Swedish krona, Swiss franc, euro, and yen, are firmer. Near midday in Europe, the Dollar Index (~95.60) is up about 0.5% on the week. Emerging market currencies are holding their own as a group. The JP Morgan Emerging Market Currency Index is rising for the third consecutive session and the third consecutive week, which matches the longest streak since November-December 2020. Gold stalled near $1848 yesterday and is heavier a little above $1834. March WTI peaked slightly above $87 yesterday and tested a four-day low today below $83 before resurfacing above $84. US natural gas is almost 3% higher after falling more than 11% over the past two sessions. Europe's benchmark has been alternating between gaining and losing sessions since the middle of last week. Its 1.4% decline today follows a nearly 7.2% advance yesterday. It is off around 7% this week. Iron ore is up more than 2%. It is the fourth consecutive session of such gains. Copper is paring yesterday's 2.5% gain.
For the first time since 2014, the BOJ did not say that inflation risks were skewed to the downside. Instead, it said the risks were generally balanced at the conclusion of its policy meeting earlier this week. However, today's December CPI reading was disappointing. The headline rate edged up to 0.8% from 0.6%. The median in the Bloomberg survey looked for a 0.9% increase. The core rate, which excludes fresh food, was unchanged at 0.5%, defying expectations for a small rise. Most disheartening was the measure that excludes energy as well as fresh food. It deteriorated to -0.7% from -0.6%, matching the worst since last June. Ironically, as the US, Europe, and many emerging market countries wrestle with price pressures, if it weren't for energy and fresh food prices, Japan would be experiencing deflation.
Chinese policymakers are concerned about the influence of its large tech companies. It sees the problem of corruption. It is not just in the private sector, but recognizes it among state-owned enterprises, including the financial sector. In the US, the Senate Judiciary Committee approved anti-trust legislation that prohibits companies providing a platform from giving an advantage to their goods and services. A similar bill passed a House committee last year but has yet made it to a floor vote. There are reportedly dozens of amendments pending.
Intra-market correlations with the dollar-yen exchange rate have broken down. The greenback is falling for the fourth consecutive session against the Japanese yen and the 11th session in the past 13. It has held slightly above last week's low near JPY113.50, where a $730 mln option is set to expire today. A $655 mln option at JPY113.85 also expires today. A close above JPY114.20, last week's settlement may help stabilize the tone. The Australian dollar recorded the week's high yesterday slightly above $0.7275. It is approaching the week's low set on Tuesday near $0.7170. There are A$1.1 bln options struck around $0.7195 that expire today, which the Aussie is hovering around as this is written. Meanwhile, the Aussie has broken higher against the New Zealand dollar after several weeks of consolidation. Today's high, above NZD1.07 is the highest since last July. Despite the lower rates in China, the yuan has ground higher. It set a nearly four-year high earlier this week and tested it today (for the dollar, that is below CNY6.34). The PBOC set the dollar's reference rate at CNY6.3492, slightly above the market's projection (Bloomberg survey) of CNY6.3490.
The UK reported dismal retail sales. Yes, the virus took a toll, but not unexpectedly. The median forecast in Bloomberg's survey was for a 0.6% decline. Instead, the most comprehensive measure fell by 3.7%. And adding insult to injury, the November series was revised to show a 1.0% gain not 1.4%. Last month's decline was the worst since last January's 8.3% plunge. Although sterling is trading off, the swaps market is undeterred and still has an almost 90% chance of a BOE rate hike at the February 3 meeting. It has about 107 bp of tightening priced in for this year.
Baltic countries were granted permission from Washington to send American weapons to Ukraine. The UK indicated earlier in the week that it too was sending defensive weapons to Ukraine. Macron's speech to the EU Parliament about the EU reaching its own "security and stability pact" with Russia was quickly rebuffed by the Russians who prefer dealing with the US. But Macron's speech no doubt did not sit well with US officials either. There does seem to be a fissure in the alliance that could be exploited by Russia for what has been dubbed a hybrid or asymmetrical warfare, like the recent cyber-attack on Ukraine. Europe itself is divided too between the eastern and central part that knows what living under the Soviet boot was like, and more pacifist leanings in the west. Meanwhile, it is thought that as long as talks continue, Russia will stay its hand.
The euro posted an outside down day yesterday by trading on both sides of Wednesday's range and settling below Wednesday's low. Follow-through selling from this bearish one-day pattern was limited and the single currency held $1.1300 after making a marginal new low for the week. Still, this week's decline (after a key reversal last Friday) has been enough for the five-day moving average to slip below the 20-day for the first time this year. Initial resistance is seen around $1.1350. Sterling is falling for the fifth session in the past six. Today's loss has pushed cable through its 20-day moving average (~$1.3570) for the first time since before Xmas. It is finding support near $1.3560 and below there, support is seen near $1.3530. A break could spur a move back toward $1.3460 early next week.
The light US economic calendar (only December's Leading Economic Indicator) will keep the focus on the equity market and next week's FOMC meeting. The Federal Reserve's preliminary report on digital currencies suggests a long-drawn-out affair ahead of us. The most important factor for this is the understandable desire to get a strong backing from the White House and Congress. A consensus is difficult to envision any time soon. The Federal Reserve provided some broad pro and con points, and is open to public commentary.
Amid the debate over US inflation, Treasury Secretary Yellen staked out the dovish view, suggesting that as the virus comes under control, price pressures will ease. She reiterated that she expects inflation to finish the year closer to 2%. President Biden's approval rating has been hit by inflation concerns. He recently claimed this was the Fed's responsibility. Yellen walked it back a bit and noted that it was a shared responsibility between the administration and the central bank.
Canada reports November retail sales today and a robust increase is expected (~1.2% after 1.3% in October). The shockingly poor US and UK retail sales were for December. While next week's FOMC meeting is expected to signal a March hike, the Bank of Canada meeting is live. Around a 2-in-3 chance of a hike by the BOC is discounted in the swaps market. Overall, six hikes are priced in for this year. Mexico and Brazil have light calendars today. Note that this week, the Mexican peso is off about 0.85%, making it one of the weakest in the EM space, while the Brazilian real has rallied about 1.6% coming into today, helped by Lula's overture toward Alckmin, a previous rival, which was understood as a signal that the former president and the most likely next president moved toward a more moderate course.
The US dollar has chopped mostly between CAD1.2450 and CAD1.2550 this week. In the past two sessions, the greenback tested the lower end of the range but rejected it and closed firmly near CAD1.2500. There is nearly $2 bln of options that expire today struck between CAD1.2545 and CAD1.2555, which may serve to reinforce the upper end of the range. It probably takes a move above CAD1.2570 to be significant. The greenback's downside momentum against the Mexican peso dried up earlier this week near the 200-day moving average (slightly below MXN20.28). The settlements in the past three days were near session highs. The dollar reached MXN20.5660 yesterday, the highest since January 6. Without follow-through buying, the greenback has slipped back below MXN20.50. Nearby support is seen around MXN20.45, which may be sufficient ahead of the weekend.
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