Slow Start to Important Week, though Rand Jumps Back

The US dollar is firmer against the euro, sterling and yen, but within the ranges seen before the weekend. The greenback is softer against the dollar-bloc currencies after early gains were unwound.

The biggest mover has been the South African rand, which is up a little more than 5%, retracing nearly half of last week's losses. Under strong pressure, President Zuma reinstated former Finance Minister Gordhan. Gordhan had been Finance Minister from 2009 until 2014. The macroeconomic condition in South Africa is difficult, and the Zuma's decision had rattled investors.

The significance of politics extends beyond South Africa. The National Front was turned back in its bid for to secure a base from which to launch a serious presidential bid in the middle of 2017. Although the National Front had performed well in the first round when the sheer number of candidates divided the opposition and Le Pen counted on a strong bloc of supporters.

However, in the second round, the fact that the National Front does not represent a majority and those opposed to it got re-engaged to resist the challenge delivered a setback. The National Front failed to carry a single region. The Socialists did better than anticipated, but still lost Paris. Sarkozy's newly branded Republicans did take seven of the 12 regions.

The week's economic calendar features what is widely anticipated to be the first Fed rate hike in nearly a decade. There are some that wonder if the meltdown in high yielding bonds is the proverbial canary in a coal mine. We suspect that Fed officials will give a market adjustment wide berth at this juncture.

Following the announcement before the weekend that China intends to monitor the yuan against a basket, the PBOC fixed the dollar higher like it has fairly consistently since the start of November. When China abandoned its peg to the dollar in 2005, it also said it would evaluate the yuan regarding a basket of currencies. The challenge China poses is not so much about what it says what it does. Its operational policy seems to diverge from its declaratory policy. The yuan weakened 0.06% today, bringing the decline here in December to 0.95%. The euro, which makes up 21.4% of the new basket, is up 3.75% so far this month, and the yen, which accounts for 14.7% of the basket, is up 1.6%.

As these performances suggest, China's new regime is not particularly transparent. However, the key takeaway is that many observers recognize in China's action a mechanism by which the yuan may decline further against the US dollar. We see this as a means by which China is trying to decouple from US monetary policy. With the Fed set to become somewhat less accommodative, China needs the flexibility to conduct a more independent monetary policy. China's equity markets seemed to like the news, and the Shanghai Composite rallied 2.5%, reversing the slightly heavier tone seen earlier this month.

The main economic report released today was Japan's Tankan Survey. The Q4 reading was largely in line with expectations, but the outlook for Q1 was a bit softer, tainting the overall results. The point is that corporate sentiment is firm, and the outlook for capex and profits is sufficiently robust as to keep the pressure of the BOJ to provide more stimulus. The BOJ meets this week and at most it may extend two lending programs that were launched before Kuroda's appointment to the head of the BOJ though the facilities have been extended before.

The drop in US shares before the weekend kept the Nikkei under water. It fell 1.8%. It gapped lower at the open and nearly filled an old gap from Oct 23 higher opening before rebounding to close near the highs. The dollar held the pre-weekend low against the yen a little below JPY120.60. The greenback is pointed to retest the JPY121.40-JPY121.60 area in North America.

The euro is trading broadly sideways even though it is lower on the day. Last Wednesday's range of roughly $1.0880 to $1.1045 continues to confine the price action. The low for the session may not be in place yet. The move can be extended toward $1.0920. Sterling is also heavier but largely within the pre-weekend range. Rightmove's monthly house price index slipped in December for the second consecutive month, and following an easing of wage momentum reported last week, highlights the gap between the Fed and BOE. Sterling may find support in the $1.5120-$1.5140.