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Overview: The US dollar is mostly softer today against the G10 currencies, with the notable exception of the yen, Swiss franc, and sterling. The risk-on mood is seen in the foreign exchange market with the Antipodean and Scandi currencies leading the move against the greenback. The yen has fallen by about 1.3% this week, leading losers, while the sterling's 1.1% gain puts it at the top.

Despite the poor showing of US equities yesterday, risk appetites returned and most of the large bourses rose in the Asia Pacific region, led by a 1.8% rally in Hong Kong and a 2.3% gain in the index of mainland companies. Both indices are up more than 11% this year. Europe's Stoxx 600, which snapped a six-day advance yesterday with a 1.6% loss has stabilized and is up about 0.4% today. It has risen by almost 6.5% here at the start of the year. US futures point to a steady to a higher opening. Meanwhile, big moves are being seen in the bond market. European benchmark 10-year yields are 7-12 bp higher and peripheral-core spreads have widened, but this is a countertrend move to what has been seen this week. The US 10-year yield is up four basis points at 3.43%. It settled last week near 3.50%. A close here would be the lowest weekly close since early last September. 
 

Asia Pacific

Japan's December inflation rose in line with expectations. The headline and core rate (excludes fresh food) rose to 4.0%. The core rates excluding energy rose to 3%. These are new cyclical highs tipped by the Tokyo CPI readings that were reported a couple of weeks ago. In fact, Tokyo's January CPI will be reported next week (January 27). Japan's inflation may peak in January or February as the impact of the fiscal efforts (subsidies) decline in energy prices, and appreciation of the yen on a trade-weighted basis (~11-12%) is anticipated. Separately, the generic 10-year JGB yield is closing at its lowest level (0.386%) since before Christmas.

China's mainland markets are closed now for the extended Lunar New Year holiday. They will not re-open until January 30. Earlier today, the one- and five-year loan prime rates were left unchanged, as widely expected, at 3.65% and 4.30%, respectively. Separately, we note that despite the talk of yuan being used more for trade, its share on the SWIFT system fell last month to 2.15% from 2.37% in November. Of course, it fluctuates a bit and last year's share varied from 3.20% in January to a low of 2.13% in October. Its shares ended in 2021 at 2.7%.

The dollar is trading firmer against the yen, recovering from yesterday's low near JPY128.40 to reach a high today close to JPY129.75. It continues to trade in the range set in the middle of the week when the BOJ met and surprised many by maintaining its current policy settings (~JPY127.55-JPY131.60). It is trading around JPY129.50 in the European morning, and if it were to close here, the greenback would be up about 1.3% this week, the most since the first full week in December. Not to get too far ahead of ourselves, but the daily momentum indicators look like they ae bottoming, suggesting further dollar gains are likely in the coming days. The Australian dollar is firmer today, stabilizing as its two-day drop took it from almost $0.7065 to nearly $0.6870 yesterday. Initial resistance near $0.6950 is holding and above their $0.6965, which marks the halfway point of the slide, may cap it ahead of the weekend. It settled last week near $0.6970. Without reclaiming it today, the Aussie would snap a four-week advance. It would be only the third weekly decline since mid-October. The greenback edged up against the Chinese yuan ahead of the holiday. It recorded a marginal new high for the week, drawing closer to CNY6.79. It is the fourth gain this week. The reference rate was set at CNY6.7702, slightly below the median projection in Bloomberg's survey of CNY6.7719.
 

Europe

The record of last month's ECB meeting, showing a "large number" of officials initially backed a 75 bp hike (rather than 50 bp that was ultimately agreed upon) and hawkish comments by ECB Lagarde seemed to push in the same direction. In addition to reaffirming the ECB's commitment to push policy rates to restrictive territory and bring inflation back to 2%, Lagarde pushed back against concerns that a recession would steady the central bank's hand, noting that growth will "not be as bad as feared." Earlier this week, a press report suggested that while a 50 bp hike on February 2 was still in the cards, there was a discussion about whether the ECB could shift to a 25 bp hike at the March meeting. As part of her message at last month's ECB meeting, Lagarde held out the possibility of a half-point move but was not as committal as she was about the magnitude of the Feb move. At the low point this week, the swaps markets saw it as a 50/50 proposition, but it is finishing the week, closer to a 66% probability.

UK December retail sales were considerably weaker than expected. They fell 1.0% and 1.1% excluding gasoline. The median forecast in Bloomberg's survey anticipated a 0.5% and 0.4% gain, respectively. The hope spurred by the unexpected resilience of the economy in November, which saw the monthly GDP rise by 0.1% rather than contract, has been dashed by these consumption figures. The details showed a rise in value terms (higher prices) and a sharp drop in volumes. Economists knew of the rail and postal strikes, and the World Cup, but may have still weighed on activity. Note that retail sales in the UK account for around a third of consumption expenditures.

The euro continues to chop around its well-worn range. It has traded between about $1.0730 and $1.0885 for the past seven sessions, including today. A key question is whether it is carving out a top or basing for another leg higher. Our bias remains the former, informed as it were by the momentum indicators and extended net long position in the futures market. That said, the $1.0940 area represents the (50%) retracement of the losses seen since January 6, 2001, high near $1.2350. For its part, sterling remains within the range set on Wednesday (~$1.2255-$1.2436). It approached but failed to take out the mid-December high closer to $1.2450. After recovering from the record low near $1.0350 at the end of September, it has mostly broadly sideways in the past month. Sterling is the strongest G10 currency so far this month, with a 2.3% gain. The Australian dollar is in second place, rising about 1.75%.
 

America

It may be too early to get a good read on the US economy at the start of the new year. The Empire State manufacturing survey was worse than expected, while the Philadelphia Fed's Business Outlook survey was better than expected, with the contraction continuing but at a slower pace. Weekly initial jobless claims for the week in which the non-farm payroll survey was conducted below 200k for the first time since last September. The weekly report is often volatile, spurred by weather-related disruptions. Despite the headlines about layoffs, the four-week moving average of new claims is the lowest since mid-May. It speaks to the continued resilience of the labor market. Meanwhile, December housing starts were a bit better than expected, but at 1.382 bln (SAAR), they were still the lowest since August 2020. Housing starts fell last year (~22%) for the first time since 2008. Permits, a leading indicator were weaker than expected and fell for the third consecutive month to finish the year down nearly 30% from a year ago.

On tap, today is the index of leading economic indicators. It is expected to have extended its downward trek for the ninth consecutive month. It only rose once last year (February). As one would expect, such a sustained decline is often associated with a recession. December's existing home sales will also be reported. They have been falling uninterrupted since last January. The median forecast in Bloomberg's survey sees the pace (SAAR) falling below 4 mln for the first time since 2010. Philadelphia Fed President Harker (a voting member of the FOMC this year) and Fed Governor Waller speak today ahead of the quiet period in the run-up to the FOMC meeting.

Canada and Mexico report November retail sales. The data seems too old to have much impact, but after a heady 1.4% increase in October, Canadian retail sales are expected to have softened (~-0.5%). They rose without fail in H1 22 but stumbled in H2 as both cause and effect of the slow growth. In H2, Canadian retail sales have a sawtooth pattern of alternating increases and declines. Mexico's retail sales are also expected to have fallen in December (~0.3%). They rose by 0.7% in October. The year-over-year pace is seen slowing to 2.2%, which would be the weakest since February 2021.

Some observers attributed the Canadian dollar's gains yesterday despite the losses in the US equities to speculation that the Bank of Canada may hike 50 bp next week, but we do not see this reflected in the swap market. The greenback jumped with Wednesday's risk-off action from around CAD1.3350 to CAD1.3500. It rose to a nearly two-week high yesterday near CAD1.3520 and came off to about CAD1.3450. The US dollar edged slightly lower today, finding support ahead of CAD1.3440. Support is seen in the CAD1.3400-20 area. After staging a key upside reversal on Wednesday, the greenback saw follow-through gains that lifted it to almost MXN19.11 yesterday. This was a little more than the halfway mark of this month's decline. There did not appear to be a macro spark and the explanation may lie with market positioning. It is consolidating today, and we suspect the pullback in the peso will provide a new buying opportunity. Initial dollar support is seen near MXN18.90.

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