USD Stretched Ahead of the Employment Report
The US dollar extended yesterday’s gains as the market adjusts positions ahead of the jobs data. Yesterday and today’s price action looks to have strengthened the near-term technical outlook for the greenback. However, the intraday momentum indicators are stretched. This warns of the risk of a counter-intuitive move after the data, barring a significant surprise. Meanwhile, one of the Fed’s leading hawkish voices, St. Louis Fed President Bullard seemed to soften his tone yesterday suggesting that 5.1% median dot for Fed funds would be sufficiently restrictive to curb price pressures. However, the less hawkish tone was offset by his suggestion that the restrictive zone should be reached as soon as possible, which seems consistent with our assessment that the market is under-estimating the chances of a 50 bp hike at the Jan 31-Feb 1 FOMC meeting.
Meanwhile, reports suggest Chinese officials are considering additional measures to help the property sector, where a crackdown on credit and leverage to developer hit sector that has been critical to Chinese growth and developments. The sector has been overwhelmed by excess capacity and reports suggesting that developers may be allowed to take on more leverage, with greater borrowing caps, and an extended period to reach the debt targets spurred gains in their equities today and helped underpin the yuan, allowing it to decouple from the weakness seen in other major currencies.
One of the reasons BOJ Governor Kuroda says that the JGB band was widened was to make policy more durable. And the reason monetary accommodation is still necessary is wage growth remains weak. The rise in inflation comes mostly from the increase in the prices of global commodities. Today’s report on labor cash earnings, showed a 0.5% increase in November year-over-year, well below the 1.7% median forecast in Bloomberg’s survey, and the lowest last year. Real cash earnings are 3.8% lower than a year ago, the biggest slump in eight years. The outcome of the spring wage round may figure prominently for the BOJ in April. There will not only be a new governor but two new deputy governors as well. The BOJ might have been able to set more of an example for the private sector, but reports suggest it only raised salaries by 0.4%. The impact of the cash earnings, and continued contraction in real terms (it has been negative since last April). The weakness in domestic demand compounds the weakness of foreign demand. Next week, Japan will report November household spending. It is expected to have slowed to a 0.3% year-over-year pace, the weakest since last May.
China, wrestling with the sudden shift away from its zero-Covid policy, may take more action on the beleaguered property market. For several months, officials have announced a bevy of measures aimed at reanimating this key engine of economic growth and development. The latest reports suggest it may relax the “three-red lines” announced last August. This would entail allowing developers to add more leverage, ease borrowing caps, and extended the grace period of reaching the new requirements from the current midyear deadline. In addition, new measures to help first-time buyers, including lower mortgage rates in cities that have seen a falling new house prices. Reports suggest that new home sales for the 100 largest property developers fell by nearly 31% year-over-year in December.
For the third consecutive session, the dollar is recording higher lower and higher highs against the Japanese yen. The brief dip below JPY130 on Tuesday took place when Tokyo markets were on holiday. The dollar is probing the JPY134.50 area, where it peaked in late December after selling off following the BOJ’s surprise move. The JPY135 area offers the next technical hurdle, but there may be potential toward JPY138 in the week ahead. The Australian dollar gave back most of Wednesday’s gains yesterday. The attempt to recover was stalled just ahead of $0.6800, where options for A$1.34 bln expire today. The Aussie frayed yesterday’s low near $0.6735. Wednesday’s low was slightly above $0.6715 and the week’s low was closer $0.6685. Below there, there the $0.6850 area may offer support. The possibility of new measures in China’s property market helped developer shares and allowed the yuan to decouple from the weakness in the yen and euro. The dollar slipped to almost CNY6.85 earlier today, its lowest level since August. It is trading above CNY6.86. The PBOC set the dollar’s reference rate tight to expectations at CNY6.8912.
After most of the largest EMU countries reported softer December headline inflation, the fact that the aggregate measure did is hardly a surprise. Still, the headline rate fell by 0.3% in the month, and this saw the year-over-year rate ease to 9.2% from 10.1%. Yet, it is well appreciated that the tax breaks and subsidies eased energy bills and helps explain the decline in the headline rate. The core rate, which excludes food and energy, rose to 5.2% from 5.0%. This is a new cyclical peak. ECB President Lagarde suggested last month that the central bank would look through the headline decline due as those fiscal measures will end later this year.
Germany reported a dramatic 5.3% drop in November factory orders. The median forecast in Bloomberg’s survey was for a 0.5% decline. October’s 0.8% gain was shaved to 0.6%. It is the largest decline since October 2021. Domestic orders fell for the second consecutive month (-1.1%), but the dramatic weakness was seen foreign orders, especially the eurozone members. Their orders fell by 10.3%. Orders from outside EMU dropped by a still sharp 6.8%. The drop in foreign orders was concentrated in capital equipment. It bodes poorly for the industrial output figures, due Monday. There is downside risk to the median forecast for a 0.2% rise. Separately, the eurozone reported stronger-than-expected November retail sales. The 0.8% increase compared with expectations for a 0.6% gain. This was helped by Germany’s 1.1% gain reported earlier today. October’s decline was revised to a 1.5% decline from 1.8%. Lagarde pre-committed the ECB to another 50 bp hike at the next meeting (February 2) and the swaps market is pricing in a strong chance of another 50 bp move at the following meeting (March 16).
The euro is breaking down. The five-day moving average has crossed below the 20-day moving average for the first time since mid-October. The euro dipped below $1.05 earlier today for the first time since December 7. A convincing break of $1.05 targets the $1.0430 area. Yet a word of caution is in order. The intraday momentum indicators are getting oversold, leaving the market vulnerable to “sell the rumor buy the fact” on the US jobs data. Resistance is seen in the $1.0540-60 area. For the past three sessions, sterling stalled around $1.2080. Yesterday it fell to about $1.1875, its lowest level since November 23. It is probing the $1.1850 area in the European morning. The convincing break of $1.19 targets the $1.1775 area. Here, too, the intraday momentum indicators are over-extended.
The focus is squarely on today’s US jobs data. Most of the recent indicators point to a firm report. The key point is that job growth is slowing but is still fairly strong, though admittedly there are discrepancies, including between the household and establishment surveys. Still, through November, the US grew almost 400k jobs a month on average last year. That is down from 560k average in the first 11 months of 2021. But to capture the recent trend, consider that in the three-month average in November was 272k, the least since January 2021. The jobs growth (compared to monthly average of about 165k in 2019 and 185k in 2018) is too strong for the Federal Reserve for two reasons. First, the shortage of labor thought to be driving up wages–as in wage-push inflation. Second, the income associated with more people working and earning more underpins demand. Assuming the Atlanta Fed’s GDPNow tracker (sees Q4 GDP at 3.8%) is in the ballpark, after contracting in H1, growth rebounded and may be around twice the level that the Fed (median forecast) sees as consistent with non-inflationary growth. The odds of a 50 bp rate hike at the January 31-February 1 FOMC meeting have crept up but by our reckoning at less than 50% are still too low.
Canada also reports its November employment data. Its full-time employment growth has averaged almost 59k a month in the three months through November. In the previous three months, it lost an average of 31.4k full-time positions a month. For the year through November, Canada grew an average of nearly 29k full-time posts, down from an average of about 49k in the first 11 months of 2021. The numbers may seem small compared to the US but remember in terms of population that US is about 8.7x larger than Canada, and its GDP is about 11.5x larger. That said, Canada has been more successful than the US in the labor force participation rate. It was around 67% before the Great Financial Crisis and at 65.5% at the end of 2019. It collapsed to slightly below 60% during the initial phase of the pandemic and recovered back to 65.5% by late 2021. It was at 64.8% in November. The US participation rate was around 66.4% before the GFC and 63.4% before the pandemic. It fell to almost 60% in early 2020 and peaked last year at 62.4%. The Bank of Canada meets on January 25. The market has gradually increased the odds of 25 bp rate hike. Shortly after the December 7 Bank of Canada meeting, the swaps market had about a 1-in-3 chance of a quarter-point hike discounted and it is now about seen as about a 70% chance.
The US dollar tested support in the CAD1.3480-CAD1.3500 area and it largely held. In yesterday’s recovery, the greenback approached CAD1.3600 and is nearer CAD1.3630 in the European morning. The upper end of the range is around CAD1.3685-CAD1.3700. Some of the US dollar buying may be related to the roughly $2.55 bln in expiring options struck between CAD1.3600 and CAD1.3615 today. Another set of options for $600 mln at CAD1.3700 also expire today. The intraday momentum indicators are stretched. The Mexican peso is trading quietly in a narrow range, with the dollar mostly holding a little above MXN19.30. So far, this week, the Mexican peso’s 0.9% gain makes it the third best emerging market currency behind the Russian rouble (~3.1%) and the Thai baht (~1.6%). It is the only Latam currency that has not fallen this week. The Colombian peso is the weakest among the emerging market currencies, off 2.3%.
Bannockburn Global Forex