A Collective Sigh of Relief

The two sources of strain on the global capital markets have eased. President Trump has backed away from military threats to take Greenland and will not go forward with tariff threat on European countries for February 1. After a dramatic sell-off on Tuesday, which some compared to what happened to the UK under Prime Minister Truss, the Japanese bond market recovered for the second consecutive session. There has been a collective sigh of relief. Equities have stabilized. Gold has pulled back. The dollar has found firmer footing. Indeed, the greenback is higher against all the G10 currencies but the yen. On the other hand, most emerging market currencies are firmer, with the notable exception of the Chinese yuan and South Korean won. 

The Supreme Court justices’ questions in the appeal to the president’s attempt to fire Federal Reserve Governor Cook seemed to be skeptical.  A decision is unlikely for at least a month, and it is possible it is sent back to a lower court to decide whether she was given due process rather than deciding on the larger issue of the Federal Reserve’s independence. 

Prices  

G10

• The high the euro set on Tuesday, slightly shy of $1.1770, likely marks the near-term peak. It spent yesterday inside Tuesday’s range and settled at $1.1685. Today’s low has been $1.1670. Options for 2.5 bln euros expire today at $1.1700 today. Risk may extend toward $1.1650, where another set of options for 1.45 bln euros expires tomorrow. 

• The greenback is trading firmer against the yen. It reached almost JPY158.90, the high for the week. So far it is the first session in three that the dollar is holding above the previous session’s low. A shelf has been established JPY157.40. New highs were recorded late in the North American yesterday. session. There may be initial potential toward JPY158.70. Given the anxiety over JGBs, and the risk of intervention, the market may be reluctant to push the greenback through the JPY159 area ahead the outcome of tomorrow’s BOJ meeting. Options for $1 bln struck at JPY159 expire today. 

• Sterling stalled in front of $1.3500 on Tuesday and yesterday returned to almost $1.3400 yesterday. It is holding today too.  It is pushing above $1.3450 in late European morning turnover but the week’s high looks to offer formidable resistance, helped perhaps with around GBP375 mln in options expiring today at $1.3495. A break of the $1.3390 area targets Monday’s low around $1.3330. With this week’s labor market and inflation update, the swaps market moved a little closer to discounting two rate cuts this year. 

• The Canadian dollar rose to a two-week high yesterday but reversed lower, suggesting a near-term high for the Loonie is in place. The US dollar fell to about CAD1.3785 before it recovered to almost CAD1.3835. It is consolidating quietly in a CAD1.3815-CAD1.3845 range. Near-term potential may extend toward CAD1.3870, and maybe CAD1.3900. Options for almost $450 mln at CAD1.3895 expire tomorrow. 

• The Australian dollar rose to nearly $0.6780 yesterday, its best level since October 2024. It traded in a narrow range most of the North American afternoon between $0.6755 and $0.6765. It settled above its upper Bollinger Band, which comes in ~$0.6770 today. The strong employment data and shifting expectations toward a hike in early February, lifted the Aussie to about $0.6810 today. Options at $0.6800 for over A$1 bln expire between Friday and Monday. 

EM

• The Mexican peso remained hot. Yesterday, it rose to its best level since June 2024, encouraged perhaps by the jump in November retail sales. The 1% rise, the most since May, compares with the median forecast in Bloomberg’s survey for a 0.2% gain. The greenback was knocked down to MXN17.4225 to bring its cumulative loss over the past two weeks to about 3.45%. It consolidated in the North American afternoon but settled below the lower Bollinger Band (~MXN17.4650 today) for the fourth time in the past five sessions. The dollar is trading quietly today between about MXN17.4380 and MXN17.50. 

• The PBOC confirmed scope for a reduction in reserve requirements and interest rate, and this seem to weigh on the yuan. It also set the dollar’s reference rate slightly higher (CNY7.0019 vs. CNY7.0014 yesterday. Against the offshore yuan, the dollar rose to a six-day high near CNH6.9765 to approach the 20-day moving average, which it has not traded above since late November.

• The dollar is consolidating slightly below yesterday’s record-high against the Indian rupee (~INR91.7450). The central bank may have intervened today but if so, the operation seems more likely meant to smooth and slow rather than reverse the rupee’s decline. 

Other Markets

• Equities have celebrated the apparently easing of tensions over Greenland. The large bourses in the Asia Pacific region rallied, with the Nikkei and Taiwan’s Taiex leading the way with 1.6%-1.7% gains. Despite the rise in Australian rates, the ASX200 gained 0.75%. Europe’s Stoxx 600 is snapping a four-day air pocket with a more than 1% gain through the morning session. Nasdaq and S&P 500 futures are up around 0.60%-0.80%. 

• Benchmark 10-year yields in Europe are mostly 1-3 basis points lower. Japanese long bond yield pulled back another 3-5 bp after yesterday’s modest recovery. The 10-year US Treasury yield is up nearly one basis point to 4.25%. 

• Gold is consolidating slightly below yesterday’s record high (~$4888.40). Silver’s record was set Tuesday near $95.88. It pulled back yesterday and found support around $90.35. It is trading has recovered to about $94.40 today. 

• March WTI held yesterday’s high (~$60.90) and has been sold back to nearly $59.50. Yesterday’s low was closer to $59.20. 

Data

• The US takes another look at Q3 GDP, which it last estimates grew at 4.3% annualized pace, bolstered by a 3.5% rise in consumption. The Atlanta Fed GDP tracker sees even faster growth in Q4. Such robust growth seems to offer a powerful argument against the administration’s drive to get the Fed to cut interest rates. The personal spending data for last October and November are due and this will impact Q4 GDP forecasts, but the headline and core deflators around 2.8% also offer a powerful argument for the Fed to standpat after cutting rates three times in the latter part of 2025. Meanwhile, last week’s dip in weekly jobless claims below 200k for only the second time since the end of 2022 was likely a fluke. 

• Mexico’s CPI for the first half of January likely accelerated and this keeps the year-over-year headline rate near 4%, the top of the 2-4% target range. The core rate has been above 4.0% since last May. It appears to be approaching the 2025 high recorded in November slightly below 4.55%. With the economy apparently stabilizing, firm inflation figures will underscore the market’s conviction that the central bank is done cutting rates. 

• Following on the heels of the UK's labor market report on Tuesday and yesterday’s inflation reports, today’s attention shifted back to government finances. The UK reported GBP11.6gpo bln net government borrowing last month. That puts the deficit in calendar 2025 at about GBP152 bln compared with almost GBP148 bln in calendar 2024. 

• Australian employment rose by 62.k in December, well above the 27k anticipated by the median forecast in Bloomberg’s survey and offsetting in full the 28.7k loss in November. The unemployment rate, which finished 2024 at 4.0%, stands at 4.1%, down from 4.3% in October and November 2025. Over the course of the year, the participation rate eased to 66.7% from 67.1% at the end of 2024. In 2024, Australia created 270k full-time positions. Last year, it fell to almost 100k. The data spurred an increase in speculation in a rate hike at the next central bank meeting in early February. 

• Japan’s trade surplus narrowed in December, breaking a strong seasonal pattern for improvement. Japan’s trade balance narrowed to almost JPY106 bln. It is the second consecutive monthly surplus but for the year as a whole, Japan recorded a trade deficit (JPY2.65 trillion or ~$16.8 bln vs JPY5.63 trillion deficit in 2024). Japan’s exports to the US rose in November for the first time since US “Liberation Day” last April but slipped in December. While studies suggest that most exporters to the US have taken a little hit from the tariffs, with American importers paying for a little more than 95% of the levies, a comparison of units and value suggest Japanese automakers have accepted narrower profit margins to maintain market share. 

• Owing to China’s own payment system, the use of the yuan on SWIFT is not a satisfying measure of the RMBs role in international trade or exchange. Still, its share of SWIFT payments eased 2.73% in December from 3.75% in December 2024 and 4.14% in December 2023. 

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