The Greenback is Finishing the Week with a Firm Tone

Overview:  The US dollar is firm against most of the major and emerging market currencies today.  Among the majors, the Japanese yen and Swiss franc are resilient. For the week, sterling and the yen appear poised to eke out small gains, while the Scandi's are the weakest performers with around a 1% decline. The freely accessible emerging market currencies, like the South African rand, Turkish lira, and Mexican peso, are leading emerging market currencies lows.  Still, the JP Morgan Emerging Market Currency Index is holding on to a modest gain for the week, which, if sustained, will snap a three-week decline.  Global equities are under pressure today.  In the Asia Pacific region, South Korea's Kospi fell 2% to lead the regional decline, but the MSCI Asia Pacific Index appears to have held on to a small gain for the week.  It has fallen in only one week since the end of October.  The 0.4% loss of the Dow Jones Stoxx 600 today is unwinding the week's earlier gains and is threatening to end the four-week advance.   US shares are trading with a lower bias as well, and the S&P 500 is starting the session with a 0.75% loss for the week.   Note that the Russell 2000 is up about 3% for the week coming into today, and it too has fallen in only one week since the US election.  Benchmark 10-year yields are mixed.  The 10-year US Treasury yield is near 1.10%, a three basis point decline on the week.  Core European bonds have edged higher, but in the periphery, including Italy, the yields are softer.  Italy's yield is paring this week's yield rise to five basis points from around 10.  Gold has recovered off the $1817.50 low at the start of the week and appears capped around $1864.  Oil is paring this week's gain that lifted it to a 10-month high.  February WTI began the week near $52.25 and rallied to nearly $54 before stalling.  

Asia Pacific

With less than a week left, the Trump administration is pressing forward with more sanctions on Chinese companies.  Nine more companies have been blacklisted due to ties with the military, including Xiaomi, a cellphone maker, and Comac, an airplane manufacturer.  The deep-water oil company CNOOC has been added to the entity list, which bans sales without pre-approval.  On the other hand, the administration has chosen not to impose retaliatory levies on Europe to the digital services taxes.  Given the timing, could these steps have been done with the approval of the transition team?  

Japan reported a disappointing 0.7% decline in the tertiary industry index in November.  Economists had expected a small gain after a revised 1.6% rise in November (initially 1.0%).  As the declared emergency was widened to cover over half of Japan's economy, there is more speculation that the Summer Olympics will have to be postponed again.   Separately, we note that the Ministry of Finance data shows Japanese investors have stepped up their foreign bond buying at the start of the year, continuing the new demand seen late last years.  Foreign investors were net sellers of Japanese shares in December, but last week bought (~JPY666 bln), the most in six weeks.  Note that the BOJ meets next week and may downgrade its assessment of the economy qualitatively and quantitatively.  

The dollar is confined to a 20-pip range so far today (~JPY103.65-JPY103.85).  There are options set to expire at JPY103.50 (~$645 mln) and JPY104.00 ($1 bln).  The high for the week was set on Monday near JPY104.40. We have a small upside bias for the US morning, but it may hold below JPY104 for the first time this week.  The Australian dollar, too, spent the week in consolidation.  After reaching $0.7820 last week, yesterday was the first time this week that it poked above $0.7800.  On the downside, last week's lows were about $0.7645, and this week's low was near $0.7665. The $0.7760-$0.7780 may offer the nearby cap in the North American session.  After some deviations in recent days, the PBOC fix was back to its more predictable course.  It was set at CNY6.4633, and the models suggested CNY6.4635.  The PBOC's money market operation attracted attention.  It allowed a net withdrawal of liquidity for the first time since July.  This pushed up money market rates and could be a signal of a less accommodative stance than seen in the past couple of months.  


The UK reported a smaller than expected contraction in November.  The 2.6% decline in output compared with expectations of a contraction of around 4.5% and follows a 0.6% increase in the previous three-month period (initially 0.4%).  Industrial output declined in November even as manufacturing production rose.  Construction was stronger than expected but a modest part of the overall economy.  Services were stronger than expected over the rolling three-month period, while the November trade shortfall was considerably larger than expected (GBP5.0 bln vs. GBP2.34 in October).  The takeaway is the new lockdowns suggest the full economic toll is not seen until this year, but the Q4 GDP may be more resilient than economists had anticipated.  

However, it is not economics but politics that is center stage.  First, the spending plans that were presented to the Italian cabinet last night were about 32 bln euros greater than a week ago, and this may be enough to keep the government intact.  A clearer view will emerge next week.  Second, the Dutch cabinet may resign en masse today to take responsibility for the huge government mistake that adversely impacted as many have 20k households who lost assistance.  Around half the households have been awarded 30k euros compensation.  The head of the opposition that was in government for some of the time resigned, and that adds pressure on the current government.  However, this may have theater involved. If the government does collapse, Prime Minister Rutte, who has been at the helm since 2010, would lead a caretaker government until the planned March elections.  Third, the CDU has begun a two-day conference to pick a new leader of the party.  While the winner of the contest would seem to have the inside track to be the party's candidate to replace Merkel in the fall elections, none of the candidates in this leadership contest are inspiring the party. There continue to be reports suggesting that the leader of Bavaria's sister party to the CDU, the CSU, Soeder, maybe a compromise candidate. 

The euro recorded one-month lows yesterday near $1.2110.  It has been to nearly $1.2165 today.  Nearby resistance is seen near $1.2180.  The downside correction that we anticipated does not appear over, but we recognize it as a counter-trend move.  The corrective meme did not play out as well in sterling, which made a marginal new 2.5 year+ high yesterday near $1.3710.  Sterling has been recording higher lows this week.  Some demand may be coming from the cross against the euro.  The euro is edging higher today and threatening to end the six-day slide.  Options for around 2 bln euros set in the GBP0.8845-GBP0.8850 expire today.  


US monetary and fiscal policy were featured yesterday.  Powell did not really break new ground, and there is no reason to have expected him to do so less than a fortnight from the FOMC meeting. Still, he clearly underscored the other governors' message that it is far too early to entertain discussions about tapering.  Although he was not as specific as Clarida in saying that inflation has to be at 2% for a year before the Fed would hike rates, Powell also talked about inflation being at the target for some time as a precondition.  On fiscal policy, Biden placed down a marker for $1.9 bln.  It may prove to be a negotiating stance. As we suggested yesterday, the signal from Washington is that support from some Republicans will be sought instead of relying on the simple Democratic majority to jam through a bill through the reconciliation process.  Passage of such fiscal support could boost US GDP from around 3.5% projected to 5.5% or so.  

A bevy of US data is on tap for today.  Despite the market's sensitivity to inflation, December PPI is unlikely to draw much attention.  It may be overshadowed by the retail sales report, where a flat report or a small gain for core sales is expected after declines of 1.1% and 0.5%, respectively, were reported in November.  At the same time, one of the first readings for January, the Empire State manufacturing survey, is due and is expected to improve marginally from the 4.9 reading in December.  Shortly after that flurry, the December industrial output and manufacturing figures are expected.  The Bloomberg survey's median forecast calls for a 0.5% rise in industrial production and manufacturing after 0.4% and 0.8%, respectively, were reported in November.  Part of the growth expected in Q4 may come from the rebuilding of inventories, which will attract economists' attention to the November business inventory figures.  

Like sterling, the Canadian dollar made a marginal new high yesterday.  The greenback slumped to CAD1.2625, taking out last week's low near CAD1.2630.  Nevertheless, there has been no follow-through US dollar selling, and the greenback has returned to CAD1.27, near yesterday's highs.  If the consolidative phase is still intact, as we suspect, there may be near-term potential for the greenback to rise toward CAD1.2730-CAD1.2750.  The US dollar made a new low for the week yesterday against the Mexican peso around MXN19.64.  Last week's low was closer to MXN19.60.  The greenback is bid in the European morning and appears to have room toward the MXN19.90 area today.  


The Greenback is Finishing the Week with a Firm Tone The Greenback is Finishing the Week with a Firm Tone Reviewed by Marc Chandler on January 15, 2021 Rating: 5
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