The euro came back offered after its seemingly inexplicable advance yesterday. The dollar was firmer against most major currencies today, with the yen an exception after JPY114.00 held on yesterday's advance. Most emerging market currencies were also softer, with a handful of smaller Asian currencies proving a bit resilient.
Most large bourses advance in the Asia Pacific region, except Japan and Australia. Europe's Stoxx 600 was steady after retreating late yesterday while US futures were pointing to a softer opening.
After rising for the past three sessions (~18 bp), the yield of the 10-year US Treasury was consolidating by hovering a little below 1.5%. European yields were 3-5 bp softer. Gold was little change. This week's quiet tone contrasted with the sharp moves in Bitcoin and Ethereum.
Oil was consolidating after the three-day advance that lifted January WTI by around 8.5%. US and European natural gas was also softer after the rally over the last few days. Iron ore, which rallied over 10% in the first two sessions this week, edged lower yesterday and was off 3% today. Copper's three-day rally was in jeopardy.
Asia Pacific
The number of countries participating in a diplomatic boycott of the Beijing Winter Olympics is growing. In addition to the US, Lithuania, Australia, New Zealand, Canada, and the UK have joined. While it may annoy Chinese officials, it is symbolic.
Given Chinese quarantine protocols, many diplomats were not going to attend in the first place. Also, the impact on China's human rights will likely be negligible. The moral righteousness is signaling to domestic constituencies. Yet, treatment of the Peng Shuai and the jailing of reporters needlessly antagonized the already precarious situation.
China's consumer inflation rose less than expected while producer prices rose more. Owing to a jump in vegetable prices (30.6%), November CPI rose 2.3% from a year ago. The median forecast (Bloomberg survey) was for a 2.5% increase. It was the fastest pace since August 2020. The decline in pork prices (-32.7% year-over-year) was slowing. Excluding pork, the CPI would have risen by 3%.
Service prices remained soft. Excluding food and energy, the core CPI was up 1.2% over the past year (1.3% previously). Producer price inflation slowed from 13.5% in October to 12.9% in November. Economists had forecast a 12.1% pace. Recall officials moved to boost supplies, including coal, helping to ease the strong upside pressures.
Officials moved to a more pro-growth stance, which means that inflation will not stand in the way of further easing monetary policy (via reserve requirements, even if not interest rates) next year. Meanwhile, Evergrande (HK:3333) and the Kaisa Group (HK:1638) formally missed debt-servicing payments on dollar obligations. Still, unlike the end of the property bubble in the US and Europe, China has been forcing banks to continue to lend.
This keeps the proverbial treadmill going. The lending figures for November, released today, illustrated it. New yuan loans, which track bank lending, rose by 50%+ to CNY1.27 trillion from CNY826 bln in October. Aggregate financing, which adds shadow banking activity to bank lending, rose to CNY2.61 trillion from CNY1.59 trillion. Note that just before publishing this report, the PBOC announced a two percentage point hike in the reserve requirement for foreign currency deposits. This will likely weigh on the yuan, initially.
Japanese weekly portfolio flows were unusually large last week. Data from the Ministry of Finance showed that Japanese investors were large sellers of foreign bonds for the second consecutive week. The JPY1.18 trillion in sales followed the divestment of JPY1.34 trillion the previous week. It was the most selling in a two-week period since February.
From a high level, most of the selling last week did not require net yen buying as Japanese investors essentially shifted into foreign equities, snapping up JPY1.2 trillion. This is the most since the time series began in 2005. Separately, foreign investors bought JPY2.0 trillion of Japanese bonds, which appears to be the second-highest on record (after the JPY2.57 trillion bought in early July). For the third consecutive week, foreign investors were small sellers of Japanese shares.
The dollar approached JPY114.00 yesterday and was turned back, falling to JPY113.35 today. The JPY114 area was "defended" by a $2.2 bln option at JPY114.10 that expires today and a $1.15 bln option at JPY114.25 that expires tomorrow. A break of JPY113.25-JPY113.35 could signal a test on JPY113.00, but the market will likely be cautious ahead of tomorrow's US CPI report.
The Australian dollar's recovery faltered earlier today slightly above $0.7185, the 20-day moving average, which it has not traded above since Nov. 4. The first retracement (38.2%) of this week's bounce was near $0.7115, but initial support was seen in the $0.7140 area.
The greenback edged slightly lower against the Chinese yuan (~CNY6.3430) before steadying and turning marginally higher. It was caught between two large options expiring today. One set was for around $2.5 bln at CNY6.34, and another set was for about $950 mln at CNY6.35. The PBOC's reference rate for the dollar today (CNY6.3498) was the largest gap with the median projection (Bloomberg, CNY6.3467) since the middle of October.
Europe
Germany's October trade figures were maybe too dated to have much market impact, but the growth of imports and exports was a constructive development. The 4.1% rise in exports, the most since July 2020, were well above expectations, as was the 5% jump in imports (most since August 2020). For Germany, it translated into a smaller than expected trade surplus (12.8 bln euros). The monthly average surplus this year through October was 15.5 bln euros, which was a little above the average for the same period last year (14.4 bln euros), but off average in 2019 (through October) of 19 bln euros.
On the heels of "party-gate," UK Prime Minister Johnson announced Plan B in the face of the new infection surge that calls for people to work from home again. It created much furor. Businesses called for more government support, and unions wanted the furlough program to be re-instituted. Any lingering ideas of a rate hike next week by the Bank of England faded. The short sterling interest rate futures contract expiring shortly was implying the lowest yield (11 bp) in three months.
Short-covering appeared to lift the euro to $1.1355 yesterday, and it settled above its 20-day moving average for the first time since Nov. 3. However, this was not a harbinger of a breakout, and the euro's gains were being pared today. Initial support was seen around $1.13 and then $1.1275 area.
Sterling recorded new lows for the year yesterday slightly below $1.3165, the (38.2%) retracement of the rally since March 2020 low. Today, it was in less than a quarter-cent range capped near $1.3215. It was consolidating weakly. There were options at $1.32 that expire today (~GBP370 mln) and tomorrow (GBP600 mln) that were likely neutralized.
America
The US reports weekly initial jobless claims, wholesale trade and inventories, and Q3 household net worth. These would not be market movers, especially today. Instead, investors' focus would likely be on equities as it waits for tomorrow's CPI.
US inflation is still accelerating, and the headline CPI is likely to move closer to 7%, setting the stage for a hawkish FOMC meeting next week. An acceleration in tapering and more officials will likely see the need for more hikes. Recall that in September, the last time officials updated their forecasts, half did not see a need to hike rates next year.
The market has done much of the heavy lifting for the Federal Reserve. The implied yield of the December 2022 Fed funds futures contract has risen around 50 bp since the September FOMC meeting.
The Bank of Canada left policy on hold yesterday, as widely expected. However, the market was disappointed that it did not upgrade its forward guidance to reflect the strong data. The swaps market was pricing in five hikes over the next 12 months, and the central bank said nothing to encourage such an aggressive stance. This left the Canadian dollar somewhat vulnerable, we thought.
Brazil did not disappoint. The central bank hiked the Selic rate by 150 bp for the second consecutive month and signaled another hike of the same magnitude in February when it meets again. It lifted the Selic rate by 750 bp this year. It was being driven by rising inflation, and the economy contracted in Q2 and Q3. The Selic rate stands at 9.25%. The IPCA inflation measure is due tomorrow, and it is expected to have risen to 10.9% (Bloomberg survey) from 10.67% in October.
Peru was expected to hike its reference rate by 50 bp to 2.5%. It would be the third 50 bp in a row. Its November CPI, reported at the start of the month, was slightly above 5.6%. Mexico reports its November CPI figures today. It is expected to rise from about 6.25% to 7.25% and set the stage for another 25 bp rate hike next week in the overnight rate to 5.25%.
The US dollar was trading firmly against the Canadian dollar, and the heavier equities may have been helping it. While initial resistance was seen near CAD1.2700, we suspect there was scope toward CAD1.2730-CAD1.2750.
The greenback fell to almost MXN20.8860 yesterday, its lowest level since Nov. 23, and the five-day moving average crossed below the 20-day moving average for the first time since early last month. The move appeared to have exhausted itself, but the dollar needed to resurface above the MXN21.05 area to boost confidence that a low was in place.