North America likely will sell USD bounce seen in Europe

Overview: The failure of the Federal Reserve to push harder against the market’s dovish view and ease financial conditions encouraged risk trades that saw the dollar and yield slumps and equity rallies. There has been limited selling of the dollar today, and a small recovery ahead of the meeting of the Bank of England and the European Central Bank. Intraday momentum indicators suggest a weak US dollar in the North American morning is likely. Despite the petro-yuan talk and others, most Middle Eastern countries, but Qatar, raised rates after the Fed, and the Hong Kong Monetary Authority as well.

Most Asia Pacific exchanges were mixed, but South Korean and Taiwanese markets continued to rally and led the region. Europe’s Stoxx 600 snapped a three-day drop and fully recovered with a 0.75% advance. US futures were mixed, with Meta’s earnings helping to lift the Nasdaq. S&P 500 futures were slightly firmer and the Dow was slightly softer. The rally in US Treasuries spilled over and raised European bonds today. British Gilts, which have seen strong foreign demand ignite. The 10-year yield is off 10 bp today, down to 3.20%. WTI March recorded a day outside yesterday, down to almost $ 76 a barrel. This consolidation today at the lower end of yesterday’s range. Meanwhile, the price of US natural gas futures is at the lowest level since the beginning of Q2 21.

Asia Pacific

After buying about JPY1.8 trillion (~$14 bln) of foreign bonds in the first two weeks of January, Japanese investors continued their divestment in the second half of the month. They sold roughly JPY1 trillion in the past two weeks. Meanwhile, the Bank of Japan bought a record amount of JGBs last month (~JPY23.7 trillion, or around $180 bln). The previous record, last June, was slightly more than JPY16 trillion.

Separately, the focus this month is the possible nomination of two deputies in the BOJ and the replacement of Governor Kuroda. Former Vice Governor Hiroshi Nakaso, who was seen as a candidate for Governor was appointed earlier today to the financial advisory body of APEC. Nakaso has recently set out an exit strategy from the BOJ’s exceptional policy. This would seem to take him out of the race. Ironically, the absence of Vice Governor Masayoshi Amamiya from public pronouncements seems to shift the pendulum in his favor to replace Kuroda. Many saw him show greater continuity, initially. Former Vice Governor Hirohide Yamaguchi has been a more vocal critic of the BOJ’s policies. His appointment will likely spur the greatest market reaction as many will see it as a clear sign of a fundamental change in BOJ policy.

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The dollar traded near JPY130.40 yesterday and broke down to JPY128.55 in reaction to the Federal Reserve.. The combination of broad dollar weakness and a sharp decline in US yields underpinned the yen, and the follow-through sale of the dollar sent slightly below JPY128.20 to its lowest level since January 19. The low of the last month was set several sessions earlier around almost a full yen down. The dollar recovered above JPY129 in late Asian trade and consolidated in the European morning. Intraday momentum indicators warn of possible fresh dollar selling as the North American session gets underway. The Australian dollar has fallen to around $0.6985 on Tuesday and rebounded smartly yesterday to $0.7145, a new high since last June. It edged up a little further today, reaching almost $0.7160. The central bank meets next week, and the market is leaning towards a 25 bp hike. The Australian dollar has pulled back almost $0.7120 in Europe. The intraday momentum indicator is getting longer, indicating here too much recent selling of the US dollar is likely in North America. The greenback gapped lower against the Chinese yuan, reaching nearly CNY6.7065 before rebounding. Still, the gap, which extended to yesterday’s low (~CNY6.7395) has not been filled. The highest value from the usual CNY6.7260. Rather than lean against the dollar’s weakness (yuan’s strength), the PBOC set the dollar’s reference rate lower than the median projection in Bloomberg’s survey (CNY6.7130 vs CNY6.7147).


It’s about the Bank of England and the European Central Bank today. The Bank of England will most likely raise 50 bp. As we noted, some big banks have switched their call to 25 bp. If the BOE was to deliver it, sterling will likely come under pressure for the same reason the dollar did yesterday. The swaps market sees the terminal rate between 4.25% and 4.50% from 3.50% currently. A quarter-point hike can see the market adjust to the lower terminal rate. The ECB Leaf is positioned to be the most hawkish of the three. ECB President Lagarde has committed to a 50 bp hike today, and the close core level of the January CPI (although German data is actually missing) keeps expectations for a 50 bp move in March high (~75% chance). Downside risks for the euro area have diminished, helped by warmer weather, lower energy prices, and what appears to be a resilient labor market. The euro zone unemployment rate in December stood at 6.6%, the first cyclical low reached last October. It was at 7.5% in Q4 19.

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Euro popped out of the consolidation range it has been stuck in and reached $1.10 yesterday. Follow-through bought raised to almost $1.1035 today but has come back to be offered in Europe. It is traded near session lows in European morning near $1.0980. There are chunky options struck at $1.10 that expire today and tomorrow (~900 mln and 1.4 bln euros, respectively). While the retracement target of the three-day rally is seen near $1.0945 and $1.0920, the intraday momentum indicator has stretched, suggesting recovery after the ECB meeting is possible. For its part, sterling remains in a good range. Although it was installed one day outside yesterday by trading on both sides of the range on Tuesday, it was held below $1.24 and saw the smallest follow-through bought today (1/100 of a cent). It has been offered again and is the weakest of the G10 currencies (off ~0.40%). The intraday momentum indicator is stretched as support near $1.23 is viewed.


Holding pattern. The market initially read the statement as hawkish mostly based on the reference to the future increase, as in the plural. However, the Powell Chair did not convince the market and it quickly reversed, sending yields and the dollar lower and stocks higher. Unlike his prepared remarks at the December press conference, Powell did not address the financial situation. When this issue was raised in the Q&A, he hardly pushed back, noting that the situation has “tightened significantly” over the past year and has not changed materially since the December meeting. It is said that Powell is not pushing hard against market developments and expectations. The implied yield of the June Fed funds futures is actually off by a few basis points. Produce a two-year record fell by nine basis points (to ~ 4.11%), the biggest move since dismal retail sales and industrial production figures on January 18. Moreover, when the dust settled, the market was more confident (marginally) a. rate cut before the end of the year. The implied yield of December fed funds futures fell to 31 bp below the September contract from 28 bp at the end of last week and Tuesday’s close.

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The United States reported Q4 unit labor costs and productivity today. This is derived from the GDP report and is likely to indicate a moderation in unit labor costs and a rise in productivity. Economists seem to pay more attention to them than to the market. Durable goods and factory orders are also available. We already know that Boeing orders and military aircraft orders helped lift durable goods orders in December, and without transportation orders, slipped. That left weekly jobless claims, which unexpectedly fell below 200k over the past two weeks. Still, with the national employment report out tomorrow, a significant market reaction is unlikely. Canada reported December building permits, which are expected to have fallen after a heady 14.1% jump in November. Mexico reports January domestic car sales and December leading indicators. Not the market mover.

The broad decline of the US Dollar post-FOMC yesterday saw it reach almost CAD1.3265, its lowest level since the middle of last November. It drew slightly closer to CAD1.3260 earlier today and has rebounded back to almost CAD1.3295. A move above CAD1.3300 can see CAD1.3330-50. The Bank of Canada indicated that it was suspended and the exchange rate still appears to be sensitive to the general risk appetite, although a little less than seen earlier last month. The Mexican peso is a different story. Trading at best level since Covid hit. The US dollar in front of MXN 18.8730 and the moving average of 20 days and crashed below MXN18.60 yesterday. Follow-through selling the dollar pushed it to almost MXN18.5250 today. The next target is in the MXN18.40-50 area and a break from it points to a move towards the MXN18.00 area, last seen in 2018. To be sure, the intraday momentum indicator is stretched here too.


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