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Overview: The US dollar is little changed the G10 currencies but softer. Comments by Bank of Japan Governor Ueda underscored that this month's meeting is live, and this sent the yen to its best level since January 6. The UK reported softer than expected consumer prices, but the timing of the data collection may have skewed the report. Still, sterling is firm, and UK Gilts have rallied. Today's North American focus is on the CPI. While yesterday's PPI came in slightly softer than expected, the components that feed into the PCE deflator were firm. 

Equities are mostly higher, though in Asia Pacific, they were more mixed, with China, South Korea, Taiwan, and Australia posting losses. Europe's Stoxx 600 is trying to end a three-day slide. US index futures are firm. European benchmark 10-year yields are mostly 3-5 bp lower, with the UK Gilts doing best with an eight basis point pullback. The 10-year US Treasury yield is a couple basis points softer at 4.77%. Gold is approaching this week's high set Monday near $2695. The high for the year was set before the weekend near $2698. The yellow metal has not been above $2700 since December 12. The strong momentum in crude oil this year stalled on Monday with February WTI slightly above $79.25. It is consolidating after retreating to about $77.25 today. 

USD: It is hard to believe that last week's December jobs data or yesterday's PPI, or even today's CPI will have much impact on the Fed's decisions, say in the second half of the year. Still, market participants believe there is sufficient economic momentum, that despite the uncertainty of the sequence and policies of the next administration, 32 bp of easing is priced in for this year, down from 43 bp at the end of last year. Consumer prices are expected to have risen by nearly 0.4% last month for a 2.9% year-over-year pace, up from 2.7% in November. Core CPI is expected to have risen 0.2% or 0.3%, depending on the rounding which could keep the year-over-year rate steady at 3.3%. The Beige Book is also due, and it has taken on a more important role under Powell's leadership. Still, with little practical chance of a change in stance, the Beige Book may not garner much attention. Tomorrow, confirmation hearings for Trump's nominee for Treasury Secretary are planned. Bessent appears to favor tariffs and there has been a discussion that implementation may begin nearly immediately but in stages. Still, it seems to be an open question how much power will be delegated to the Cabinet and how much retained in the White House. The consolidation in Dollar Index still looks favorable. Support near 109.00 area has frayed a little. The next support is seen in the 108.50-65 area. A close above 109.30-40 may signal the end of the brief correction. 

EURO:  The euro extended Monday's recovery to almost $1.0310 yesterday, where it nearly met the (50%) retracement objective of the leg down from the January 6 high slightly above $1.0435. It has edged up to slightly above $1.0315. The next objective is in the $1.0335-50 area. On the downside, a break of $1.0250 could spur a move back to $1.02, where large options roll off today (2.2 bln euros) and Friday (2.5 bln euros). Expiring options at $1.03 are also hefty; 1.1 bln euros today and 2.7 bln euros on Friday. Earlier today, the eurozone reported a 0.2% rise in November industrial output. Recall that Germany's industrial production exceeded the 0.5% median forecast in Bloomberg's survey and jumped 1.5%. French industrial production rose by 0.2%. It had been expected to fall by 0.1%. Italy's was reported yesterday. It rose by 0.3%. The median forecast in Bloomberg's survey was for a 01% gain. Among the large eurozone members, Spain was the disappointment, posting a 0.8% decline. Lastly, surprising no one, the Bundesbank estimated that the Germany economy contracted by 0.2% last year. That follows a 0.3% contraction in 2023. Although no details are offered on this initial annual estimate, it appears to be consistent with stagnation or possibly a 0.1% contraction in Q4. 

CNY:  The PBOC has squeezed liquidity conditions in both Hong Kong and the mainland in trying to stabilize the yuan, which continues to trade near the lower end of the 2% band it is permitted against the US dollar. Before last weekend, the dollar traded to almost CNY7.3330 and has not been above CNY7.3320 this week. Ahead of next week's US inauguration and the tariff threat "on day one," there is little incentive to buy yuan, and continued consolidation may be the best that can be mustered. For two weeks now the greenback has been confined to the range against the offshore yuan recorded on December 31 (~CNH7.3055-CNH7.37). Some argue that the Beijing is letting the yuan trade on the low side of the band to signal to the US that it is willing to depreciate the yuan if the US hikes tariffs. This seems an ideologically inspired assessment. The yuan has fallen by about 3.1% since the US election. The euro has fallen by 5.7% and sterling by around 6.4%. The Japanese yen has depreciated by 4%. There is no signal here from Beijing about tariffs. The dollar has risen broadly, and Chinese officials have acted to moderate its gains against the yuan. Yes, the dollar could rise more against the world's currencies, including the yuan if Trump carries through with his tariff threats, which would China harder than others.

JPY: Comments from BOJ Governor Ueda underscored what his deputy said yesterday: A rate hike will be considered later this month. Ueda seemed upbeat and optimistic about the coming wage round. The swaps market responded accordingly, raising the odds of a hike and the yen jumped in the foreign exchange market. The dollar has been sold to almost JPY156.70 today, its lowest since JPY156.25 was visited on January 6. Options for $1.8 bln at JPY157 expire Friday. In recent days, the dollar has traded on both sides of the 20-day moving average (~JPY157.50 today) but has not settled below it for a little over a month. A break of JPY156 could spur an initial move toward JPY155. 

GBP: Sterling's bounce stalled yesterday at $1.2250, a little below the five-day moving average and slightly short of the (38.2%) retracement of the leg down (from January 7, ~$1.2575) found near $1.2280. It remains below there today, albeit slightly. Options for almost GBP705 mln at $1.2275 expire in a few hours but seem less relevant than they did yesterday. Today's December CPI was a little softer than expected. News that the ONS collected data earlier than usual last month and missed the holiday-related rise in airfares may reduce consumer inflation by a little over 0.1%. The headline rose by 0.3% (instead of 0.4%), but due to the base effect, the year-over-year rate was slipped to 2.5% from 2.6%. The core and service prices moderated. The former to 3.2% (from 3.5%), while the latter slowed to 4.4% from 5.0%. Deflation in producer prices is subsiding. The market feels more confident about a Bank of England rate cut next month. The odds are no near 90%, up from about 66% at the end of last year. The market has about 52 bp of cuts discounted for this year, down from about 60 bp at the end of 2024. Meanwhile, the 10-year Gilt yield continues to consolidate in last Thursday's range (~4.78%-4.92%) and the market easily absorbed the GBP4 bln 10-year Gilt sale today as the 4.25% bond of 2034 was re-opened. Still, the bid-cover of 2.8 was the least since September 2023. 

CAD: The US dollar has continued to move broadly sideways against the Canadian dollar. It remains within the range set on January 6 (~CAD1.4280-CAD1.4450). The sideways movement coincided with a seven-session decline in the US two-year premium over Canada. It has eased from almost 137 bp on January 6 to about 120 bp yesterday, the narrowest spread in a month. Canada reports November manufacturing and wholesales sales today. Neither typically moves the market. A drop in December existing home sales, the first since July, following a nearly a 15% increase in the four months through November, may draw some attention. The odds of a cut later this month has been trimmed from almost 80% at the end of last year to less than 65% now. The swaps market is discounting 47 bp of cuts this year, which is about 17 bp less than seen at the end of 2024.

AUD:  The Australian dollar's bounce from the lowest level since Covid (~$0.6130) on Monday faltered a little above $0.6200 yesterday. It has edged up slightly today to test the 20-day moving average and the (50%) retracement of the losses since last week's high, found near $0.6215. The Aussie has not closed above its 20-day moving average since November 7, a couple days after the US election, when the Fed cut the Fed funds target by 25 bp. Australia reports December jobs data first thing tomorrow. Through November, Australia created almost 394k jobs in 2024 (~432k in the first 11 months of 2023). Of these nearly 336k were full time positions (vs ~209k in Jan-Nov 2023). The unemployment rate was mostly between 3.9% and 4.1% last year and it may have finished the year at 4.0% (3.9% in December 2023). The participation rate was at 66.6% at the end of 2023 and probably 67.0% at the end of 2024.

MXN: The dollar has traded in a little more than a 3% range so far this year against the Mexican peso. After trading above MXN20.71 briefly in early Asia Pacific activity on Tuesday, the dollar eased to almost MXN20.45 in North America yesterday. It is trading quietly so far today between about MXN20.50 and MXN20.56. A break of MXN20.40-MXN20.45 could signal a move to the lower end of the recent range (~MXN20.24-MXN20.25). Given the threat of tariffs on "day one" of the new US administration, the peso seems vulnerable to soundbites and social media references. Mexico's president is expected to unveil new initiatives on Friday to appeal to multinational companies with the eye toward substituting imports from China with domestic production. 

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