The US dollar's sharp upside momentum stalled yesterday near JPY115 and after the euro met (and surpassed) a key retracement level slightly below $1.1300. Led by the Antipodean currencies today, the greenback was mostly trading with a heavier bias. Among the majors, helped by a steadying of US yields, the yen was soft.
In the emerging market space, the Turkish lira continued its headlong plunge while the yuan softened and the Mexican peso was off. Hungary's central bank surprised with a 70 bp hike in the one-week deposit rate. The JP Morgan Emerging Market Currency Index was posting a small gain through the European morning.
Disappointing tech results in China (Baidu (NASDAQ:BIDU) and Bilibili (NASDAQ:BILI)) weighed on Chinese shares, but most markets in the region fell but Australia and Taiwan. Europe's Stoxx 600 was struggling to extend the six-day advance. US futures were also a little firmer.
After yesterday's four basis point pullback, the US 10-year yield was little changed near 1.58%. European yields were 1-2 bp lower. Gold remained within Tuesday's range (~$1850-$1877), but the moment seen earlier last week has faded, and the yellow metal was trading choppily in a consolidative phase.
The prospect of a coordinated sale of oil after China announced it would tap its reserves for the second time saw the January WTI contract fall to $76.45, its lowest level since early October. Still, the price stabilized in the European morning around $77 a barrel. The benchmark European natural gas contract (Netherlands) extended yesterday's pullback. It settled a little below 75 euros last week, and after two days of declines, it was above 92 euros.
Iron ore was also falling for a second session, lower on the week. Note that it settled October a little above $104 and was now around $86.40. Copper was lower for the fourth consecutive session. It was trading around $424, off $20.5 this week.
Asia Pacific
Japan is expected to unveil the much-awaited supplemental budget tomorrow. Prime Minister Kishida will get one bite of the proverbial apple, and he is expected to go big. Talk of the size of the overall package has risen in recent days. The Nikkei seemed to suggest a JPY79 trillion (~$690 bln) effort, while others reported something on the magnitude of JPY56 trillion. Still, it was recognized that part of the budget will include funds that were earmarked under previous budgets, which have not been spent. The clear water was seen around JPY32 trillion. Japan is one of the few countries that will provide new fiscal support.
New Zealand's central bank meets next week. It is widely expected to hike rates for the second time in the cycle. The swaps market had 200 bp of tightening priced in for the next 12 months. The cash rate stood at 50 bp. Earlier today, the central bank reported that the two-year inflation expectations (business survey) rose to 2.96% in Q4 from 2.27% in Q3. It was the highest in a decade. The one-year expectation rose to 3.7% from 3.02%. Still, with other countries slower to raise rates, a 50 bp move may not be necessary. The Kiwi rose almost 4% last month and has given back nearly half so far in November. Separately, the Philippines and Indonesia central banks met and left rates steady as expected.
The dollar posted a key reversal against the yen yesterday. It made a new high for the move, a few pips below JPY115.00, and proceeded to sell-off and close (slightly) below Tuesday's low. However, follow-through selling has been limited, and the greenback was trading firmly but may be absorbing sales related to the $1.34 bln in options in the JPY114.20-JPY114.25 area that expire today.
The Australian dollar initially extended its losses to almost $0.7250, where a A$575 mln option expires today. However, since early in the Asian session, it has posted corrective upticks and looked set to challenge yesterday's high and five-day moving average a little above $0.7300.
The Chinese yuan appeared to have begun consolidating. It remained in the range set on Tuesday. That saw the dollar trade roughly between CNY6.3670 and CNY6.3965. The small gain was the third this week. The PBOC fix was at CNY6.3803, a bit firmer compared with expectations (CNY6.3786 in the Bloomberg survey) than seen recently. Note that there is a $1 bln option at CNY6.3830 that expires today.
Europe
The auto industry in Europe remained under pressure last month, though the US reported its first increase in sales in six months. New car registration in Europe, including the UK, is a proxy for sales. They tumbled by slightly more than 30% year-over-year in October. This is considerably weaker than expected and is the poorest since May 2020. The shortage of semiconductors is the likely culprit, and there are some signs of improvement.
The EC will propose modest tweaks in rules about how funds outside of its borders (UK) can be managed while avoiding more dramatic changes. Draft proposals called for at least two full-time senior managers in the EU and for regulators to be notified when most of their assets were managed outside the EU. These seemed quite minor and unlikely to disrupt the UK fund business.
Earlier this month, the EU Commissioner for Financial Services indicated that temporary waivers would be granted to allow EU banks and money managers to clear trades in the UK. Meanwhile, the dispute over fishing appeared to be worsening (Denmark complaining, not just France), and the UK continued to threaten to invoke Article 16. Former Prime Minister Blair said he will propose a solution to the dispute over the Northern Ireland Protocol in the coming days.
Hungary delivered a 30 bp hike in the base rate earlier this week, which now stands at 2.10%. It warned that it could make a separate decision on its one-week deposit rate. It did so today, hiking it 70 bp to 2.50%. It was a hawkish move that sent the forint higher.
Separately, as widely expected, the Central Bank of the Republic of Turkey cut the one-week repo rate 100 bps to 15%. As a result, the lira was weaker for the eighth consecutive session. The lira's weakness not only fuels inflation but also will challenge companies and banks with foreign exchange exposure. The dollar finished last month near TRY9.60 and after the rate hike, pushed above TRY10.97 before stabilizing.
The euro overshot the (61.8%) retracement target of the rally that took it from near $1.0640 in March 2020 to high on Jan. 6, around $1.2350. That retracement target was about $1.1290, and the euro fell to around $1.1265 yesterday. It recovered to new session highs early in North America yesterday (~$1.1330), leaving bullish hammer candlestick, and follow-through buying lifted it to $1.1345 today.
The combination of higher inflation and stronger retail sales this week helped sterling to recover. It had traded near $1.3350 at the end of last week and has barely traded below $1.34 this week. Indeed, sterling was rising today for the fifth consecutive session, the longest advance in nearly seven months. It poked above $1.35, where an option for about GBP345 mln will expire today. A convincing move above $1.3515 could signal another cent advance. The euro slipped to below GBP0.8385 today before recovering. It was testing the GBP0.8400, which held options for 1.1 bln euros that also expire today.
America
Leave aside the gaffes by President Biden over Taiwan. Bloomberg counts four such verbal blunders that have required official walk back or explanation or clarification. Reports indicated that Biden probed Xi about oil sales. China has intervened in the commodities (industrial metals) and crude oil market recently. Today it indicated it will provide more oil from its strategic reserves.
In September action, China sold 7.1 mln barrels, according to reports, and privately sold more. It was unclear whether today's sales were planned or grew out of the "virtual summit." Still, it put the ball back into the US court. If the US does not sell or lend oil from its strategic reserves, it will look bad after China's move.
On the other hand, its own agency (EIA) projected that it may not be needed as oil will be in oversupply shortly. Moreover, the pain for consumers has been coming from gasoline prices, not oil per se. Drawing down strategic reserves may not help the gasoline market. Apparently, Japan was approached by the US about coordinating the release of oil, though Europe was not.
The US reports weekly initial jobless claims today. They have fallen for six consecutive weeks, and at 267k, it is the lowest since the pandemic struck. That said, at the end of 2019, there were below 220k. The Philadelphia and Kansas City Feds publish their November survey results. Both surprised last month, with the former on the downside and the latter on the upside. This time it may be the other way around, with the Philly survey showing strength and the KC survey softer. Canada reports its monthly portfolio flow data ahead of tomorrow's retail sales report. Mexico and Brazil have light economic calendars.
Canada's Prime Minister Trudeau and Mexico's President AMLO visit Washington today for the North America's Leaders Summit. There was tension among the "three amigos." The Build Back Better US initiative contains several elements that favor American producers. A key one is that substantial tax break for Americans buying electric vehicles if they are made in the US. This would seem to put Canada and Mexico at a disadvantage, given the integration of the auto sector on a continental basis.
Mexico and Canada are also concerned that the Biden Administration's interpretation of the domestic content requirement in the USMCA treaty was also narrow and put them at a disadvantage. Canada was also concerned about the pipelines after Biden nixed the Keystone Pipeline in one of his first acts in office, and the Line 5 pipeline was being challenged by Michigan.
The US, and to a less extent, Canada, was worried about the efforts by AMLO to increase the power of the state sector energy companies (oil and electricity), deterring private sector efforts. The US may try pressing against this on environmental grounds. Climate and immigration were reportedly on the top of today's agenda.
The US dollar reversed higher against the Canadian dollar on Tuesday, posting an outside up day. Follow-through buying yesterday lifted the greenback a little above CAD1.2620. It ticked ever so slightly higher today but came back offered. Support was seen in the CAD1.2555-CAD1.2575 area. The $1.04 bln option at CAD1.25 that expires today is too far away to be impactful.
Meanwhile, the US dollar remained within Tuesday's range against the Mexican peso (~MXN20.56-MXN20.85). This range looked set to hold today.