Yen Leads Charge Against the Dollar Amid Falling Rates

Overview: The Japanese yen is leading the charge against the dollar today. Short covering in the Japanese bond market, the decline in US rates, and some reports of real money saw the dollar tumble to around JPY149.25 to approach the low for the month near JPY149.20. All the G10 currencies are firmer today, as are all but a few emerging market currencies. The Dollar Index finished October near 106.55 and it has been finding support near 104.00 in recent days. A break targets the 103.00-50. Benchmark 10-year yields are lower. In Europe, yields are mostly 7-8 bp lower. Disappointing UK retail sales has pushed 10-year Gilt yields 10 bp lower. Italian bonds are participating fully in rally even though Moody's rating update is due later today. The US 10-year yield is pushing below 4.40%. 

The poor news stream from Alibaba, another casualty in the US-China chip war, weighed on Hong Kong shares and mainland shares that trade there, but the reginal performance was mixed. Not so in Europe, where the Stoxx 600 is up over 1% to bring this week's rise to almost 3%. US index futures are firm. The S&P 500 is up 2.1% coming into today to put the finishing touches on its third consecutive weekly advance. The NASDAQ is up 2.3% this week so far and its three-week rally has lifted the benchmark by more than 11%. The softer dollar and rates are bolstering gold. The yellow metal is above $1990, up about 2.7% this week. January WTI has stabilized after yesterday's 4.8% slide. It fell to nearly $72.35 yesterday and is approaching $74 today. 

Asia Pacific

The light economic calendar today provides an opportunity to summarize this week's key developments in the region. In terms of economic data, four points stand out. First, Japan's economy contracted more than expected in Q3 (2.1% annualized) and the deflator rose (5.1% from 3.5%). Consumption was flat after falling 0.9% in Q2. Second, China reported weak October lending, though there was reportedly a surge in bond issuance. The property sector continues to suck wind, while the economic recovery remains unsatisfactory. Third, Australia’s labor market has slowed, and in the four months through October, has lost nearly 30k full-time jobs. The 3.7% unemployment rate is the upper end of where it has been over the past 18 months. The 67% participation rate matches the record high. Fourth, South Korea's memory ship exports increased in October for the first time in 16 months. Overall, South Korea's exports rose for the first time this year. In terms of political developments, Xi's meeting with Biden and Kishida, the first such bilateral meetings in a year was the highlight, but news that the opposition parties in Taiwan have agreed to run a single candidate (which will be decided over the weekend) could have far reaching implications for January's election and cross-strait relations.

The pullback in US rates reinforced the sense that the dollar is toppish near JPY152.00. The greenback has been sold to around JPY149.25 and is approaching the low for the month near JPY149.20. There had not been much reaction to BOJ Governor Ueda's comment there were advantages and disadvantages of a weak yen. Deputy Finance Minister Akazawa told the Diet that there is not specific exchange-rate level for intervention, which is aimed at "excess volatility." Reports suggest short covering in Japanese bond market and real money demand for yen. The 10-year yield spiked down to 0.72%, its lowest since mid-September. The 10-year yield was near 0.90% on Monday. Note that the lower Bollinger Band is near JPY149, and the greenback has not traded below it in four months. That said, a loss of JPY148 would encourage talk of a dollar top. The Australian dollar spent yesterday consolidating the nearly two-cent rally scored this week. It tested the (38.2%) retracement objective of the gains off last Friday's low (~$0.6340) found around $0.6465. It made a marginal new low slightly above $0.6450 and found a bid that lifted it back above $0.6500. On Wednesday, the Aussie saw $0.6540, its best level since mid-August. The technical outlook is constructive, and the Aussie can work its way back up to the $0.6585-$0.6600, which houses the 200-day moving average and the (50%) retracement target of the sell-off since the mid-July high near $0.6900. The Chinese yuan is also rising on the back of the broadly weaker US dollar. The yuan is at its best level since mid-August. The dollar, which was pushing against CNY7.30 at the start of the week is now closer to CNY7.23. If chart support is meaningful in this highly managed currency pair, it may be near CNY7.20. For the first time in several weeks, the PBOC set the dollar's reference rate slightly weaker (CNY7.1728 vs. CNY7.1724). The average in Bloomberg's survey was for CNY7.25 (vs. CNY7.2453 yesterday). It is the fourth consecutive session that the yuan has strengthened. This week's gain of about 0.7% is the most in about two months. 


Eurozone data in recent days have not changed the outlook substantively. The economy contracted by 0.1% in Q3, and economic impulses are weak. Economists expect a stagnant performance this quarter, which might be a tad optimistic. The swaps market has 80% chance that the first rate cut will be delivered in April. A week ago, the odds were a little below 70%. The US and EU remain unable to find a way past the Trump-imposed steel and aluminum tariffs. The US has proposed "Plan B" to extend the status quo through the end of 2025, which is a truce struck last year (after recriminating tariffs on ~10% of the bilateral trade) and expires at the end of next month. That truce replaced US tariffs with "tariff-rate quotas" and Europe froze all its measures. The status quo then favors the US, it appears. Rather than quarterly quota, Europe is seeking annual thresholds and a US commitment to retain a liberal exclusion stance. Separately, Germany's high court ruled against the government's off-budget funding to address climate change, which could call into question this other such funding vehicles. 

It has been a busy week in the UK. Home Secretary Braverman has the ignoble distinction of being fired twice--once by then Prime Minister Truss and again last week by Sunak. Sunak had not only resurrected Braverman a year ago, but he has brought back former Prime Minister Cameron as foreign secretary. In terms of economic data, the UK reported a somewhat stronger than job growth and stickier average weekly earnings and softer than expected October CPI (4.6%, down from 6.7% in September) and year-over-year declines producer prices. Today, the UK reported an unexpected 0.3% fall in retail sales (volume) after September's decline was revised to -1.1% from -0.9%. Excluding gasoline, retail sales slipped 0.1%. Still, the decline in retail sales was broad-based. Reports indicated that all retail sectors experienced a decline in sales but non-store retailers and "other stores". Alongside gasoline, the slump in household goods was noted. The swaps market is discounting around a 70% chance that the Bank of England cuts rates next May. That is up from about 20% at the end of last week.

The euro recorded a marginal new high of almost $1.09 yesterday. It has not traded above there since the end of August. The $1.0860 area corresponds to the (50%) retracement objective of the decline from the year's high set in mid-July near $1.1275. The next retracement (61.8%) is closer to $1.0960. Still, after closing above its upper Bollinger Band for the past two sessions, the euro settled back inside it (~$1.0865). It fell to $1.0825 in late Asia/early European activity but rallied to new session highs in Europe near $1.0875. After stalling slightly above $1.25 on Tuesday and Wednesday, sterling set back to almost $1.2375 yesterday before catching a bid and settled back near $1.2420. It retested the low today before recovering to $1.2430. While sterling has retraced (38.2%) of its decline since the mid-July high (~$1.3140), the next retracement (50%) is near $1.2590. It had settled above the upper Bollinger Band on Tuesday but move back within it on Wednesday and remained inside yesterday. The upper band is near $1.2495 today. 


The US reported softer than expected October CPI, PPI, and industrial output, while the decline in headline retail sales was a little less than expected and September's increase was revised slightly higher. Continuing jobless claims rose for the eighth consecutive week to reach a two-year high, while initial claims at their highest level since August. The much-awaited Biden-Xi meeting agreed to renew military communication and China pledged to crackdown on fentanyl. The partial government shutdown has been averted, or more accurately, spending authorization was extended into Q1 24. Separately, the Biden administration’s “Indo-Pacific Economic Framework" was dealt a significant setback at the hands of fellow Democrats. The IPEF was not enthusiastically embraced by US allies as it did not offer access to the US market. Still, many seemed surprised that it was dropped for domestic political considerations, while the war in Israel jeopardizes the pipeline that was supposed to be an alternative to China's Belt-Road Initiative. 

The data drove US rates sharply lower. The 10-year yield plunged more than 25 bp this week, the most in four months. After probing the 5% threshold in late October, the yield slipped slightly below 4.38% today. The two-year yield, which peaked near 5.25% on October 19, reached almost 4.79%. The implied yield of the December 2024 Fed funds futures is about 4.43%, down from 4.69% a week ago, which implies three rate cuts and nearly 2/3 of a chance of a fourth cut.

The greenback rose to almost CAD1.3780 to meet the (61.8%) retracement of the losses from last Friday's high near CAD1.3855. Some attributed the Canadian dollar's weakness to the nearly 5.5% slump in crude (WTI) prices, which followed a 2% decline on Wednesday amid rising US inventories. Still, the correlation between changes in the exchange rate and oil prices is less than 0.25 and is at the low end of this year's range. We also note that the New Zealand dollar fell more than the Canadian dollar and the Australian dollar was lost nearly as much. On the other hand, the weakest of the G10 currencies was the Norwegian krone. The greenback has pulled back to around CAD1.3720 today. A close below CAD1.3700 would weaken the technical tone. The US dollar fell to new lows since late September against the Mexican peso, near MXN17.22 yesterday and follow-through selling today has seen it approach MXN17.19. Lower US rates, the recovery of emerging market currencies in general, and the falling out of favor of the Colombia peso after the unexpectedly weak GDP figures on Wednesday may have helped Mexico outperform. The objective of the double top pattern carved out in October near MXN18.50 is closer to MXN17.00. As the peso has recovered, implied volatility has fallen. Three-month vol peaked in early October near 14.6% and has slipped below 12% to near the 200-day moving average (~11.8%).



Yen Leads Charge Against the Dollar Amid Falling Rates Yen Leads Charge Against the Dollar Amid Falling Rates Reviewed by Marc Chandler on November 17, 2023 Rating: 5
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