A Sea Of Red Gives The Dollar A Bid

Overview: The steepest loss in US equities since last October is rippling through the capital markets in the form of de-risking.  The rout is not over, and the S&P 500 (SPX) is poised to gap lower.   Many of the largest markets in the Asia Pacific region were off around 2%.  The nearly 1% loss in Europe's Dow Jones Stoxx 600 leaves the benchmark virtually flat for the year.  Even companies that beat earnings expectations, like Apple (AAPL), have found little succor from investors looking for an exit.  Bond markets appear to be drawing some support, but benchmark yields are only slightly lower, and the US 10-year is straddling the 1%-level.  The dollar is higher (UUP).  The gains are most pronounced against the dollar bloc.  The yen, often supported by dramatic risk-off moves, is under pressure as it flirts with the low set earlier this month (~JPY104.40).  It is the euro that is holding up best and is little changed through the European morning. Emerging market currencies are mostly a sea of red, though the Turkish lira and Chinese yuan are notable exceptions and posting minor gains. The JP Morgan Emerging Market Currency Index is trading lower for the fifth session of the past six.  Money fleeing other markets does not appear to be drawn to gold, which is holding below its 200-day moving average (~$1850).  It also is off for the fifth session in the past six.  Even the largest drawdown of US crude oil inventories (9.9 mln barrels) has not deterred the selling.  A recovering late in the European morning has seen March WTI recover to nearly flat on the day after dropping around 1% in earlier turnover (OIL).  

Asia Pacific

The focus has been on the dramatic decline in equities, and macroeconomic news has been light. The main economic data report was Japanese December retail sales.  The 0.8% decline was a touch more than expected, and it followed a 2.1% decline in November. However, the 0.3% year-over-year decline was a little better than expected. Tomorrow, Japan reports December employment and industrial output figures.  Industrial production is expected to have contracted by around 1.5% after a 0.5% decline in November.  The labor market has deteriorated under the pandemic and formal state of emergency.  The unemployment rate may have ticked up to 3%, and the jobs-to-applicant may have deteriorated. 

The dollar is firm against the yen and knocking on the year's high near JPY104.40.  A move above JPY104.50, which the (61.8%) retracement of the decline since the November high just shy of JPY105.70.  Initial support is seen by JPY104.20, yesterday's high (FXY).  The Australian dollar's bullish outside up day on Tuesday was followed by a bearish outside down day yesterday.  Follow-through selling today pushed the Aussie a little below $0.7600, to a new low for the month/year.  A break of $0.7590 could signal a test on $0.7500, which is the (38.2%) retracement of the rally that began in early November.  Resistance is now seen around $0.7660 (FXA).  The PBOC set the dollar's reference rate at CNY6.4845, which was a little stronger than the banks Bloomberg surveyed expected. The dollar rose to almost a two-week high around CNY6.4950 before easing back toward CNY6.47 (CYB).  The PBOC continued its draining campaign, and overnight repo has increased to 3.05%, the highest in nearly six years.  The Lunar New Year celebration begins on February 11, and the financial system will need liquidity injections around it, but funding costs may remain elevated.  The rising repo rate deters the funding of bond purchases, and China's 10-year yield is near 3.20%, its highest in a month.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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