Dollar and Yields Ease Further, but Look for Recovery

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  • After a choppy North American session yesterday, the dollar and US yields remain under pressure
  • The main consideration appears to be the further unwinding of positions as no more details of the new administration’s policies were provided
  • Intraday technicals suggest the North American session is likely to see the dollar recover
  • China reported a larger than expected increase in new yuan loans in December
  • Brazil central bank cut rates a larger than expected 75 bp yesterday to 13%
  • Turkey’s central bank tightened liquidity by not offering any funding at 8% via the 1-week repo auction today
  • Peru’s central bank is expected to keep rates steady at 4.25%

The dollar is broadly weaker against the majors.  The yen and Swedish krona are outperforming, while sterling and the euro are underperforming.  EM currencies are mostly stronger.  ZAR and KRW are outperforming, while SGD and PHP are underperforming.  MSCI Asia Pacific was up 1%, even with the Nikkei falling 1.2%.  MSCI EM is up 1.1%, even with China markets falling 0.5%.  Euro Stoxx 600 is down 0.3% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is down 5 bp at 2.33%.  Commodity prices are mostly higher, with Brent oil up nearly 1%, copper up 0.3%, and gold up 1.1%.

After a choppy North American session yesterday, the dollar and US yields remain under pressure.  The dollar is lower against all the major currencies and most emerging market currencies, including the recently shellacked Turkish lira and Mexican peso.

The main consideration appears to be the further unwinding of positions as no more details of the new administration’s policies were provided.  The one economic element, a reiteration that going forward pharmaceutical companies will have to bid for the US government contracts appeared to weigh on the share prices of some companies in that space.  For example, the Nikkei’s 1.2% decline was paced by a 3.3% decline in pharmaceuticals/biotech.  In Europe, the Dow Jones 600 is off about 0.5% in late morning turnover, with health care the weakest sector.  Within that, pharmaceuticals/biotech is off 2.1%.

The Dollar Index fell it its lowest level since December 14, the day the Fed hiked rates.  The low on that day was 100.73.  Today’s low, thus far, is 100.81.  The US 10-year bond yield reached almost 2.3% today.  That is the lowest yield since November 30.  The two-year yield has slipped to 1.14%, its lowest level in about a month.

However, the intraday technicals suggest the North American session is likely to see the dollar recover.   Most of the dollar’s drop was recorded in Asia, and European participants showed little appetite to extend the move.  Yesterday, amid trendless and particularly choppy activity, the euro fell to almost $1.0450 but quickly popped back to record new session highs just below $.10625.  Follow through buying in Asia lifted it to $1.0665.  It has drifted lower in Europe and the intraday technical indicators are rolling over.  A break below $1.0580-$1.0600 now would lend credence to the idea that a near-term high may be in place.

We had recognized the risk that a push lower in the US rates could see the dollar slump toward JPY114.25-JPY114.50.  Late in the Asian session, the dollar reached almost JPY113.75.  Yesterday’s high was near JPY116.90.  The technical indicators are suggesting the low may be in place.  The JPY114.50 now offers resistance, but a move above there would see JPY115.00-JPY115.50, perhaps ahead of the weekend, with the help of a robust US retail sales report.

To start the week, sterling broke below $1.22 for the first time in more than two months.  It managed to close back above it yesterday, and follow through buying lifted it to almost $1.2320.  While the momentum has eased, it has found some bids near $1.2250 on the pullback.  The intraday technicals are not generating as strong a signal as is the case for the euro and yen.

The dollar-bloc currencies are strong.  The Australian dollar briefly poked through $0.7500 for the first time since the Fed’s rate hike.  It is retaining its gains better than most of the other majors, but the intraday indicators also warn of a pullback.  Initial support is near $0.7480 and then $0.7450.

The US dollar has fallen to its lowest level against the Canadian dollar since October 20.  Growing confidence in the pick-up in the Canadian economy, higher oil, and commodity prices, and being seen as a proxy for the US dollar appear to be fueling demand.  A US dollar low near CAD1.3030 seen in early Europe, however, may either be the session low or very close to it.  An initial greenback recovery could carry back to CAD1.3100-CAD1.3120.

The Swedish krona has gained nearly one percent against the dollar.  It was helped by news of a somewhat higher than expected inflation.  Many understand this to mean that there is less likelihood of additional monetary easing.  CPI rose 0.5% in December to lift the year-over-year rate to 1.7% from 1.4%.  It is the strongest pace since early 2012.  The measure of inflation that uses fixed mortgage interest rates (CPIF) rose 1.9% year-over-year.  This is the highest since 2010.

Swedish bonds are underperforming as a result too.  The bonds are essentially flat while most European yields are being dragged lower by the fall in US yields. German, French, and Italian 10-year yields are off 2-3 bp, while Spain, Portugal, and the UK are seeing 4-7 bp declines.

Lastly, China reported a larger than expected increase in new yuan loans in December (CNY1.04 trillion), which is a three-month high.  However, the aggregate financing pace slowed to CNY1.63 trillion from a CNY1.74 trillion.  This would seem to reflect a decline in shadow banking activity.  The onshore yuan rose 0.5% today and the offshore yuan a little less.  Although the squeeze in the Hong Kong money market rates has unwound almost fully, the fact that the offshore yuan (CNH) is trading stronger than the onshore yuan (CNY) suggests speculative pressures have not reemerged (yet).

The North American session features import prices and weekly jobless claims.  However, no fewer than six Fed officials speak today.  Five regional presidents will speak throughout the day.  Yellen speaks this evening.

Brazil central bank cut rates a larger than expected 75 bp yesterday to 13%.   The bank noted that it had established a “new rhythm of easing” and that the decision was unanimous.  With such a dovish signal, another 75 bp cut seems likely at the next COPOM meeting February 22.  This would be a very aggressive pace, but we think much will depend on how things are developing globally.

Turkey’s central bank tightened liquidity by not offering any funding at 8% via the 1-week repo auction today.  Local banks were expected to borrow at 10% via the late liquidity window.  The central bank’s next policy meeting is January 24, where a rate hike is needed to help support the lira and to arrest building price pressures. The lira is gaining today, but much of it is due to wider EM gains.  Failure to hike this month would likely see the lira weaken in disappointment.

Peru’s central bank is expected to keep rates steady at 4.25%.  CPI eased to 3.23% y/y in December from 3.35% in November, but remains above the 1-3% target range.  An easing cycle is likely to start later this year if disinflation continues.  Colombia has already started its easing cycle, but Peru and Chile are likely to lag it.