Yen Tumbles to New Low on BOJ Comments
The dollar is narrowly mixed against most of the G10 currencies as it continues to consolidate its recent gains. The yen is the notable exception, and it was sold today, not in response to developments in the US Treasury market, a frequent driver, but in response to comments by a deputy governor of the central bank, suggesting a rate adjustment would not necessarily signal the start of a tightening cycle, which some economists expected. Emerging market currencies are also mostly narrowly mixed. Central European currencies are firmer, even the Czech koruna, ahead of what is expected to be the second cut in the cycle that began in December. More deflation readings from China did the yuan no favors, but the yen’s weakness may have weighed on it, ahead of the long holiday celebration. India’s central bank stood pat, and the rupee is flat. The Mexican peso is little changed ahead of the CPI report and the central bank meeting later today.
The weaker yen and BOJ comments helped lift the Nikkei by 2% today and it is now up over 10% this year. China’s shares were higher too. Hong Kong and India, among the large markets, traded heavily. Europe’s Stoxx 600 is recouping yesterday’s 0.25% loss and bank shares have steadied after falling 1.4% yesterday. US index futures are narrowly mixed. The 10-year JGB yield slipped back below 0.70%, while benchmark yields in Europe are little changed. The 10-year US Treasury yield is up slightly at 4.11%. Ahead of today’s final leg of the quarterly refunding, the 30-year yield is up a basis point to 4.33%. Gold is quietly hovering around $2029-$2039. March WTI is trading at a new high for the week near $74.40. It is the third session of higher highs after bottoming on Monday near $71.40.
Seemingly under-appreciated by many observers who continue to make gratuitous references to Japan’s export prowess, the world’s third-largest economy has run trade deficits for the past three years. It also recorded trade deficits in the two years before Covid. That said, for only the third time since July 2021, Japan reported a monthly trade surplus in December (~JPY69 bln or ~$470 mln). On the balance of payments basis, which was reported today, a larger surplus was recorded (~JPY115.5 bln). On this basis, it was the fourth monthly surplus since October 2021. Nevertheless, Japan’s current account surplus is substantial near 3.5% of GDP in 2023 and near pre-Covid proportionality. And despite the trade surplus, the current account surplus narrowed in December, as it has done for the past 11 Decembers.
China remains in deflation. Consumer prices fell on a year-over-year basis for the fourth consecutive month. The 0.8% decline in January was more than expected and follows a 0.3% decline in December. Yet, to simply roll out the trope about weak demand seems to underappreciate that retail sales rose 7.2% in nominal terms on a year-over-year basis in 2023. Weakness in retail sales -0.2% in 2022) was an issue, and it followed a 12.5% increase in 2021. Goods price deflation (-1.7%) is evident in China and elsewhere. Services prices are 0.5% higher than a year ago. Outside of the widely experienced goods deflation, food prices are the main deflationary headwind, and weak demand is a less satisfying answer. Food prices are off nearly 6% from a year ago. This is about supply. Non-food prices rose by 0.4% year-over-year. The core rate, which excludes food and energy, remains positive since a brief dip into deflation territory in January 2021. It rose by 0.4%. Still, it has not been above 1% since March 2022. In January, consumer prices rose by 0.3% after a 0.1% increase in December. Producer prices are a different story. Deflation forces have gripped producer goods since Q4 22. The year-over-year decline has been 2.5% and 3.0% in the last four months. In January, producer prices were 2.5% lower than a year ago, after falling by 0.2% in the month.
The dollar’s range against the yen yesterday was set in the first couple of hours of the North American session, roughly JPY147.65-JPY148.25. With little impetus coming from the flattish Treasury market, despite a healthy reception to the large ($42 bln) 10-year note sale, which snapped a string of four consecutive tailed auctions (when the auction produces a result at a higher yield that what was trading in the when-issued market). However, today, the dollar was helped by comments by the Deputy Governor of the Bank of Japan Uchida. He played down the start of a strong tightening cycle even after the first hike is delivered. This helped lift the greenback to a three-month high above JPY149.00. We had suggested potential toward JPY149.20, but this may not be sufficient. Above there, the next target may be near JPY149.75, ahead of the psychologically important JPY150 area. The Australian dollar stalled at $0.6540 yesterday, the halfway mark of its losses from high seen a little before the US jobs data at the end of last week (~$0.6610). It spent little time below $0.6520, but the close was weak. It is trading with a small downside bias today and has returned to almost $0.6500. Chart support is not seen until closer to the $0.6480 area. The greenback has edged up against the Chinese yuan but is holding below the week’s high set on Monday near CNY7.1985. The PBOC set the dollar’s reference rate at CNY7.1063 (CNY7.1049 yesterday). The average in the Bloomberg survey was CNY7.1919 (CNY7.1858 yesterday). The mainland market will be closed tomorrow and through next week to celebrate the lunar New Year. One-month implied volatility for the offshore yuan eased to about 3.5%, the lowest in more than two months.
China’s property market bubble was purposely popped in 2021. The direct global ramifications seem modest as foreign exposures were limited. The same cannot be said of the US commercial real estate market. Earlier this month, Japan’s Aozora bank attributed its first loss in 15 years to bad loans in the US property market. A two-day decline erased 33% of its value last week. Warning of refinancing risk in the US commercial real estate market, Deutsche Bank increased its provisions for losses stemming from the US commercial real estate market by four-fold. Yesterday, Deutsche Pfandbriedbank bonds came under pressure due to US real estate exposure, for which it increased loss provisions. In the Global Financial Crisis, German Landesbanks were a weak link due to their exposures to the US subprime market. US Treasury Secretary Yellen told the Senate Banking Committee on Tuesday that losses stemming from the commercial real estate are worrisome, but opined the problem was manageable. The market seemed less convinced. The KBW regional bank share index for the third consecutive session yesterday, bringing the weekly losses to about 3.5% after tumbling 7.2% last week. The European bank share index slipped by slightly less than 0.5% last week and is off about 2% this week.
The euro extended its recovery after trading slightly below $1.0725 on Monday and Tuesday and reached almost $1.0785 in early North American dealings yesterday and has risen to almost $1.0790 today. The euro’s upticks are not yet impressive enough to give confidence that a low of some importance is in place. It has stalled in front of the (38.2%) retracement of the Friday-Monday sell-off (~ $1.0790). We suspect that the euro needs to rise above the $1.0835 area to lift the tone. Sterling spent most of yesterday back into the $1.26-$1.28 trading range that has dominated the activity in recent weeks after breaking to the downside on Monday. It approached the (50%) retracement objective near $1.2645 of the sell-off from last pre-jobs data high (~$1.2770) and is holding below there today. Sterling is in a narrow quarter-cent range below $1.2640 today. The next retracement is closer to $1.2675 and the 20-day moving average is near $1.2685.
In addition to monitoring the performance of regional US banks, market participants will take note of two other developments today. First, weekly initial jobless claims have risen for the past two weeks and at 224k in late January, are the highest since last August. They have not risen for more than two consecutive weeks in more than three months. The median forecast in Bloomberg’s survey anticipates a small decline (and in continuing claims). Second, today is the last and most challenging leg of the Treasury’s quarterly refunding, $25 bln 30-year bonds. That is an increase of $4 bln. Last month’s sale generated a bid-cover of 2.37, slightly below the December outcome. The yield was about 4.23% and the yield is not 5-6 bp higher. The reception seems to rest on investors desire to extend duration. Lastly, 11 Fed officials have spoken this week and despite the different voices, the signal that the Fed is in no hurry to cut interest rates remains intact. The odds of a March cut remain downgraded to less than a 1-in-4 chance, and the odds of a May cut (~90%) are virtually unchanged from the end of last week. Many Fed watchers look for discord, hidden by the absence of dissents but without splitting hairs, it is tough to find it in this week’s speeches Richmond Fed President Barkin, a voting member of the FOMC this year, appears on Bloomberg TV shortly, and then speaks at the Economic Club of New York near midday. Barkin spoke yesterday. He is very much part of the consensus that sees rate cuts being appropriate “as the economy normalizes and inflation’s downward path becomes more certain.
Mexico is center stage today. Shortly, it will report January CPI, and then, later today, the central bank meets. Headline CPI likely rose for the third consecutive month. It bottomed in October near 4.25% and finished last year around 4.65%. The median forecast in Bloomberg’s survey sees it headed toward 4.90%. Food and energy are the main culprits, without which inflation likely slowed. Core CPI has fallen consistently since January 2023 when it rose to 8.45% from 8.35% at the end of 2022. It likely slowed below 5% last month. Moreover, the core rate is likely to slip below the headline rate for the first time since September 2022. A slowing economy and moderating price pressures will likely allow the central bank to cut rates but not quite yet, though several central banks in the region (Brazil, Chile, Colombia, and Peru) have already extended the easing cycle that began last year. Peru’s central bank meets today, and it is expected to deliver its sixth consecutive quarter-point cut. Next month, Banxico meets on March 21, the day after the FOMC meeting concludes. At most, we suspect, the officials will soften their rhetoric to pave the ground for a cut next month. Before the meeting, officials will see February CPI and more real sector data for Q1 24. The economy practically stalled in Q4 23, eking out 0.1% quarter-over-quarter growth. Economists (Bloomberg survey) sees the Mexican economy growing by 0.4%-0.5% for the next six quarters.
The recent price action reinforces the significance of the CAD1.3535-45 cap for the US dollar. It stalled there (twice) last month and that is where it stalled earlier this week. The greenback reached nearly CAD1.3450 yesterday to briefly trade below the 20-day moving average (~CAD1.3455) and approach the halfway point (~CAD1.3450) of the rally from last week’s low near CAD1.3360. A marginal new low has been set today but the exchange rate is practically flat in the European morning. The next retracement (61.8%) is by CAD1.3430. Canada’s January employment report tomorrow may spur some last-minute position adjustments today. The Mexican peso traded quietly ahead of today’s events. The greenback found support near MXN17.00, and it has not closed above its five-day moving average (now ~MXN17.08) in the past five sessions. The momentum indicators are trending lower, and the five-day moving average has fallen back below the 20-day moving average, we think it is still a crowded trade (long Mexico) and suspect the US dollar recovers ahead of the weekend.
Bannockburn Global Forex