US-China exchange export restrictions, Yuan is sold to new lows for the year

Overview: The US dollar has extended the losses scored late yesterday when Federal Reserve Governor Waller indicated he was still leaning toward a December rate cut. The odds of a rate cut rose to around 76% from about 66% at the end of last week. The odds are slightly lower today, around 72%. A solid jobs report on Friday and another uptick in CPI may change some minds. The only G10 currency that is weaker today is the Japanese yen, and it is off about 0.25%. Emerging market currencies are mixed. Asia Pacific currencies are mostly lower, and the central European currencies are mostly higher. Of note, tit-for-tat exports controls between the US chips and fabrication equipment and Beijing's export ban to the US of some critical minerals and metals. The yuan was sold to a new low for the year today. 

 Asia Pacific and European equities are advancing today. Japan, Hong Kong, South Korea, and Taiwanese indices gained more than 1%. The Stoxx 600 in Europe is up for the fourth consecutive session, matching its longest advance since May. US index futures are little changed. European bonds yields are firmer, but the French premium over Germany is a few basis points narrower today, despite the tension, and France's CAC 40 is outperforming Germany as well today. The 10-year US Treasury yield is up almost three basis points to 4.22%. The two-year yield is flat near 4.18%. Gold is firm and is trading in the upper end of yesterday's range. It is holding below $2650. January WTI appears to be forging a base near $68. It has not settled above $70 since November 22. 

Asia Pacific

With the Japanese cabinet approving the nearly JPY14 trillion (~$92 bln) supplemental budget, the focus has shifted back to the Bank of Japan. Governor Ueda has kept the door open to a move on December 19 but has not made firm commitment. The swaps market has been discounting about 13-17 bp increase since mid-November. The other key issue in the region is whether China will provide more economic support. The PBOC governor has hinted at scope for cut in reserve requirements to help meet the coming maturity hump of PBOC instruments. Separately, and with little fanfare, the PBOC has begun a quantitative easing operation. In the four months through November, it has purchased about CNY700 bln (~$97 bln) of government bonds. China's 10-year yield is below 2% and two-year yield 1.30%. Also, following the latest US efforts to tighten China's access to advanced chip tools and technology, Beijing announced an outright ban of sales to germanium, gallium, antimony, and superhard materials to the US. Australia's central bank meets next week and there is practically no chance of a move. Today it reported a A$14.1 bln Q3 current account deficit after a revised A$16.4 bln shortfall in Q2 (initially A$10.7 bln deficit). Its deficit this year will be the first since 2018. Tomorrow sees Q3 GDP. Growth may have picked up toward 0.5% after it expanded by 0.2% for the previous three quarters. 

Despite the firmer US 10-year yield yesterday on the back of mostly better than expected data, the dollar remained heavy against the yen, and reached almost JPY149 as European dealers were closing their books for the day. It stabilized in the North American afternoon but could not re-establish a foothold above JPY150. It is in a JPY149.50-JPY150.25 range today. Still, we suspect the dollar is near a low and the between the US jobs data at the end of this week and the CPI next week, rising US rates will likely favor the greenback. The Australian dollar traded poorly and posted its lowest close in a week yesterday. It was turned down from the 20-day moving average (~$0.6525) and fell to a four-day low slightly below $0.6445. Despite the wider current account deficit, the Australian dollar is trading with a firmer bias today. It recovered to $0.6505 in the early European trade. Initial support is around $0.6475. The New Zealand dollar stopped 1/100 of a cent below the pre-weekend high and fell to a three-day low near $0.5865. It set the low for the year last week, slightly below $0.5800 around the second consecutive 50 bp rate cut. It too is trading with a firmer bias today near $0.5900. Meanwhile, the greenback has been bid to a new high for the year against the offshore yuan near CNH7.3150. Before the weekend, the dollar traded near CNH7.2280. It is about 1.2% higher. Last year's high was near CNH7.3680. The PBOC set the dollar's reference rate at CNY7.1996 (CNY7.1865 yesterday). The average projection in Bloomberg's survey was CNY7.2691, suggesting the PBOC continues to retrain the upward pressure on the dollar/downside pressure on the yuan. 

Europe

There are two main drags on the euro: politics and economics. The eurozone is practically stagnant and the pro-cyclical fiscal policy saddles most of the region with austerity. The German government will most likely lose of a vote of confidence later this month, paving the way for a general election in mid-Q1 25. On the other hand, France is being hung on its petard. Macron's snap election this summer failed to produce stable government. A confidence vote looks to take place tomorrow, and the Barnier government is unlikely to survive. Yet, Macon cannot call another parliament election until next July. The ECB meets next week and is widely expected to cut 25 bp on December 12. The odds of a larger move have been pared to around 15%, less than half of had prevailed after the dismal preliminary PMI on November 22. The final service and composite PMI are due tomorrow. The preliminary composite PMI stood at 48.1, down from 50 in October. The UK's preliminary composite PMI dipped below 50 (49.9) for the first time since October 2023. The Bank of England meets on December 19, the day after the FOMC meeting concludes. Despite the disappointing data, a rate cut would surprise the market.

The middle is the smallest grouping in the French parliament, yet Macron and his prime minister Barnier seemed to act as if this was not the case in drafting the 2025 budget. The French government refused to make the compromises necessary to secure a majority. That is not extortion. A vote of confidence could take place as soon as tomorrow. With French 10-year yields near Greek levels, there is much handwringing and finger-pointing. However, this is not Frexit or a default crisis. To insure against default (credit default swaps) for five years costs a little more than 41 bp. This is the most since H1 2020, but Italy and Greece are near 60 bp. The French 10-year premium over Germany is approaching 90 bp, the most in a dozen years. It was less than 50 bp toward the end of Q1 24. The euro seemed to have been dragged lower by the French developments, and the better US data. The single currency fell to nearly $1.0460, which is around the middle of the move from $1.0335 on November 22 to the recent high slightly shy of $1.06. The euro recovered to $1.0530 in by early European dealings and faces nearby resistance in the $1.0540-50 area. Sterling traded miserably yesterday after rising every session last week. It was sold to a three-session low near $1.2615. Sterling has stabilized today but the upticks have been capped in front of $1.27. The 20-day moving average is slightly above there, and cable has not settled above it since the Fed cut rates last month. 

America

Yesterday's US data were mostly better than expected and continues to offer a stark contrast with Europe. The manufacturing PMI was revised up (49.7 vs. 48.8) and the ISM manufacturing was better than expected (48.4 vs. 47.5 expected and 46.5 in October). The forward-looking new orders component rose above 50 (50.4) for the first time since March. Employment is still contracting, but at 48.1, the ISM manufacturing employment sub-index was the highest in five months. On tap today is the October JOLTS report and a small rise in expected after the largest decline of the year was reported in September (-5.3%). Auto sales will trickle in over the course of the session. US sales have averaged 15.6 mln vehicles a month, up from the 15.4 mln average in the first ten months of 2023. Auto sales are seen around a 16.0 mln seasonally adjust annual rate, but the steep discounts in the face of 3.5-year high in inventory/sales ratio may have helped boost sales. The average new car incentive was near $3.3k, almost $1k more than a year ago. Canada has a light calendar today. Tomorrow, Q3 productivity and the November services and composite PMI are due. October trade and IVEY survey are Thursday, ahead of Friday's employment report. With Q3 GDP behind it, Mexico's September investment and consumption data are unlikely to draw much attention. The October unemployment rate may have slipped through 2.9%. Next Monday's November CPI may clear the way for a rate cut at the December 19 central bank meeting.

After peaking last week on Trump's tariff threats near CAD1.4180, the greenback ground lower and fell to almost CAD1.3980 ahead of the weekend. It held the low yesterday and recovered to CAD1.4090. It is difficult to identify a separate driver of the Canadian dollar apart from the broader greenback gains. In fact, the yen was the only currency to have gained on the US dollar and that was minor. After the yen, the 0.3% decline put the Canadian dollar as the second strongest G10 currency. The US dollar eased back into the CAD1.4040-50 area in afternoon dealings and returned to CAD1.4010 today. Initially, the dollar rose toward MXN20.6025 in the North American morning but retreated toward session lows, finding support near MXN20.37. Between the reaction to the US election and the Fed rate cut, the dollar traced out a range of roughly MXN19.76 and MXN20.80. With the single exception of Trump's tariff threat on Mexico, against which Mexico's President Sheinbaum pushed back against (and threatened retaliatory tariffs), the dollar has remained in that range. The US dollar jumped to a record-high near BRL6.1150 at the end of last week but settled near BRL5.97. The greenback rose yesterday and briefly pushed above BRL6.09. It posted a record-high close around BRL6.07.