The greenback is mostly softer amid consolidation

Overview: The corrective forces seen at work in the foreign exchange market yesterday are still intact today after the flurry around US President-elects pushback against reports of a narrower application of his tariff threat. Led by the Antipodean currencies that were so beaten up at the end of last year, most of the G10 currencies are firmer even if mostly in yesterday's range. The yen and Swiss franc are the weakest performers and are sporting small losses near midday in Europe. A busy US economic calendar (trade, JOLTS, and ISM services) and a $39 bln sale of 10-year notes are the highlights. News that Mark Carney is considering running to replace Trudeau as leader of Canada's Liberal Party is a talking point today, but the initial impact seems marginal. Emerging market currencies are mostly higher against the dollar, as well. Yesterday, the Mexican peso was the top performer, but it is a laggard today, along with the Turkish lira. 

Most of the large Asia Pacific equities rallied with the Nikkei rising nearly 2%. The Hang Seng was a notable exception. It fell by 1.2%, weighed down by the US Department of Defense blacklisted Tencent and the liquidity squeeze in Hong Kong. The US "small yard and high fence" approach is appearing less small. Europe's Stoxx 600 is extending yesterday's gains, while US index futures are slightly firmer. European benchmark 10-year yields are 2-4 bp higher. The 10-year US Treasury yield is up one basis point to 4.64%. Gold is firm near $2643, showing little response to news that the PBOC added to its holdings last month. February WTI initially extended yesterday's pullback but has come back better bid and is near $73.75 ahead of the US open. 

USD: The greenback unwound a good part of last week's gains with yesterday's pullback. The 0.8% decline in the Dollar Index was the largest since late November. After recovering to around 108.40 earlier today, it is back below last year's settlement (108.00). Nearby support is seen in the 107.50-75 area. A break could spur a move to 107.00. It seems to be driven by some position squaring, perhaps ahead of the employment report at the end of the week. Today's high-frequency economic data are expected to show a widening of the US November trade deficit due primarily to an increase in imports of industrial supplies and capital equipment, while consumer goods imports eased (according to preliminary data), a small increase in JOLTS jobs openings, and a modest rise in the ISM services PMI (the S&P version, confirmed yesterday, saw services activity rise to 58.5 from 56.1, a new cyclical high). 

Euro: With yesterday's advance slightly above $1.0435, the euro retraced half of its losses since December 6.the last US employment report. It frayed the 20-day moving average for the first time since December 18. The next retracement (61.8%) is near $1.0475. Arguably, encouraging the position-adjusting ahead of US jobs report at the end of the week, the US two-year premium over Germany has been pushing lower. It has not risen since December 20. It reached about 206 bp yesterday. It peaked on December 18 near 233 bp. Spain's December CPI, reported at the end of last year, and Germany's reported yesterday, signaled the gains in the aggregate report today. It rose by 0.4% to 2.4% year-over-year (from 2.2%). The core rate was flat at 2.7%. The rise is mostly a function of the base effect from energy. Here is what is in the pipeline, after January. In Feb-April last year, the eurozone's aggregate CPI rose an annualized rate of around 8.8%. This will drop out of the year-over-year comparison, and points to inflation falling below 2%. In the context of weak economic impulses, the ECB is unlikely to be deterred from delivering a 25 bp cut at the end of the month.

JPY: The dollar practically traversed its two-week trading range yesterday between JPY156 an JPY158. It traded on both sides of Friday's holiday-thinned range, but the settlement was little changed, neutralizing the technical implications. The greenback was bid in the local session today to about JPY158.40, a new high since July, but was met with sellers that pushed it back to around JPY157.40 by early European turnover. Japan's 10-year bond sale was well received. The bid-to-cover ratio (3.36) was the highest since last October.

CNY: The US dollar also explored a wide range yesterday but remained within the range set on December 31 against the offshore yuan (~CNH7.3055-CNH7.3695). It is inside yesterday's range today. The PBOC lowered the dollar's fix today (CNY7.1879 vs CNY7.1876 yesterday) for the first time in seven sessions. The greenback reached nearly CNH7.3650 yesterday and is consolidating today. In addition to managing the yuan through the fix, the PBOC also has engineered a squeeze in the offshore market in Hong Kong. The overnight rate HIBOR rate for the offshore yuan jumped to 8.1%, the highest since June 2021 today. One-month HIBOR rose to 4.4%, the highest since April last year. China reported a $63.50 bln decline in its reserves, the largest decline since April 2022. It is clear that Beijing is not recycling its trade surplus into US Treasuries as it did in the past. According to the US Treasury data, China's Treasury holdings were valued at $760.1 bln as of October, the least since 2009. The PBOC bought gold for the second consecutive month after a six-month pause. 

GBP: Sterling jumped to about $1.2550 yesterday, a four-day high. It surpassed the (38.2%) retracement of its losses from the $1.2880 level since on December 6, with the last US jobs report. Today, it approached the next retracement (50%) near $1.2580, which is a little above the 20-day moving average. It may take a move above $1.2610 to spur the next round of short covering. Yesterday, the S&P confirmed that the UK's composite (manufacturing and services output) fell for the fourth consecutive month in December to finish the year at its lowest level since October 2023. Today, S&P reported that the December construction PMI continued to alternate monthly between gains and losses as it has since the middle of last year. The December construction PMI unwound the net gain from August to November to sit at 53.3. 

CAD: Prime Minister Trudeau announced he would step down as head of the Liberal Party, and when a replacement has been chosen, he will resign as prime minister. Parliament has been suspended until March 24 during the process. The new leader will be the next prime minister, but a poison chalice will be passed on as a new election will likely be called and the Conservatives are running well ahead in the polls. Amid its broad pullback yesterday, the greenback reached CAD1.4280 in early North American dealings, but Trump's renewed tariff threat helped it rebound to almost CAD1.4380 before European markets closed for the day. The greenback held below CAD1.4350 so far today and is straddling the CAD1.4300 area in the European morning. Former Bank of Canada and Bank of England Governor Carney has indicated he is considering running for Liberal Party leaders. Canada reports November merchandise trade and Ivey PMI. Neither are typically market movers. In the first ten months of 2024, Canada experienced a near C$740 mln deficit, but runs a trade surplus with the US. Meanwhile, the sharp fall in Canada's Composite December PMI (49.0 vs. 51.5) warns of the downside risk to the IVEY survey. 

AUD: The Australian dollar, which recorded the 2024 low on the last trading day of the year near $0.6180, briefly poked through $0.6300 yesterday. Sellers emerged and pushed it back to about $0.6235. That has held today, and the Aussie is pushing near $0.6290 now. Australia reports November monthly CPI first thing tomorrow, and the median forecast in Bloomberg's survey sees it ticking up to 2.2% from 2.1% where it was in September and October. In November 2023, it was at 4.3%. The swaps market has the RBA cutting about 70 bp while the Fed is seen cutting by 40 bp. Australia's two-year yield is around 34 bp below the comparable US yield. It was near a 50 bp discount in mid-December, the largest since last July. A move above $0.6315 could spur a correction toward $0.6350. 

MXN: The peso recorded a marginal new low for the year on December 31 but has recovered smartly in recent days. The greenback reached almost MXN20.91 on New Year's Eve, and in yesterday's broad decline reached MXN20.2450. Yesterday, the peso rose by about 1.3%, making it the strongest emerging market currency, outside of the Russian ruble. It proved fairly resilient in the face of Trump's denial that his tariff plans are being diluted. The dollar is consolidating in a MXN20.2775-MXN20.3560 range so far today. The carry (rate differential) is still hefty though Mexico cut rates 125 bp last year, and this squeezes peso shorts when the downside momentum stalls, as it has. Mexico reports December CPI on Thursday. The swaps market has 115 bp of cuts discounted for 2025.