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Overview: After some intraday penetration, the euro finally settled above $1.09 yesterday. However, follow-through buying has been limited, and technical and option-related resistance is seen in the $1.0940-50 area. The dollar is more broadly mixed today, with the dollar bloc and Norwegian krone leading the advancers. The euro, yen, and sterling are nursing small losses near midday in Europe. The recovery of US equity indices yesterday after gap lower openings failed to help most of the Asia Pacific markets. However, the re-opening in Hong Kong saw sizeable gains and South Korea's Kospi continued its advance after re-opening yesterday, despite news that the economy contracted by 0.4% in Q4 22. Europe's Stoxx 600 has recouped the losses of the past two sessions, and US futures are trading with a firmer bias. 

Bond markets are under pressure and benchmark 10-year yields are up mostly 3-5 basis points in Europe and US. There is a host of US economic data today and the first estimate of Q4 GDP is the highlight. Also, strong demand has been seen as this year's Treasury auctions and $35 bln of seven-year notes will be sold today. Gold made a new marginal high near $1950 before reversing lower and is now near $1935. There is much attention in the energy space as US natgas prices are below $3 for the first time since May 2021. Europe's benchmark is off for the fourth consecutive session and is near its lowest level since September 2021. March WTI is consolidating mostly between $80-$81.
 

Asia Pacific

China markets do not re-open until Monday, but some preliminary reports on travel, movie-going, and other activities will feed into the optimistic narrative. The early findings suggested improvement year-over-year. On the other hand, some observers are concerned about a surge of Covid post-holiday and in rural parts of the country with less medical infrastructure. Still, the optimism about the post-Covid Chinese economy seems to be a strong conviction idea rippling through some industrial metals like copper and iron ore and helps explain the strength of the Australian dollar, Brazilian real, and Chilean peso. Before the Lunar New Year, the Chinese yuan was nearly flat for the year (~0.15%). 

The IMF's Deputy Managing Director Gopinath seemed critical of the Bank of Japan's December surprise, urging it to communicate more clearly about its policy intentions. She warned of the upside risks still to Japanese inflation and advocated a more flexible approach to managing its Yield Curve Control. She suggests three possible options to allow more flexibility around the long-term JGB yields, 1) widen the 10-year yield band, 2) shorten the yield curve target (which the IMF had previously suggested), and 3) shift back to a quantity target of JGB purchases. That said, the IMF expects core Japanese inflation (excludes fresh food) to peak here in Q1 and gradually fall back to below 2% by the end of next year. It projects growth this year in the world's third-largest economy at 1.8% and then slowing to 0.9% next year. 

The dollar slipped to a marginal new three-day low against the yen near JPY129 in the Asian session but recovered to JPY130 by early in the European morning. This was more the less the high from the North American session yesterday. A move above there would target the JPY130.50 area, but more likely, given the stretched intraday momentum indicators, the dollar pullback first. There are options for $2 bln struck at JPY130 that expire today. The Australian dollar extended the surge that has carried it from almost $0.6870 last week to nearly $0.7130 today. It is near last August's high (~$0.7135). The session high does not seem to be in place and a marginal new high is likely in North America. In the period ahead, the next technical target is around $0.7280-$0.7300, the (61.8%) retracement of the losses since the peak in March 2021 and the high from last June. After knocking on the CNH6.80 area with no success pushing through, and given the greenback's heavier tone more broadly, it may not be surprising the dollar has been pushed down to almost CNH76.7250, an eight-day low. Perhaps the market was also encouraged by the strong gains as the Hang Seng re-opened (~2.4%) and the index of mainland shares that trade in HK (~3%).
 

Europe

The two-day protest at Italian gas stations was called off yesterday amid new talks. The issue was not paid but the government's new requirement that gas stations show the average gasoline price in the area. The goal was to reduce alleged gouging. It added to the pressure on Prime Minister Meloni, who has not renewed the fuel subsidy that ended last month. However, it could also mark the low point in the trend that has seen the Italian interest rate premium over Germany narrow considerably. A new divergence of economic performance and inflation may materialize. German industry seems to be in a better place than Italy, and German inflation is falling and slowing much faster than it is in Italy.

The euro settled for the first time since last April above $1.09 and edged ever so slightly higher today. However, it has stopped short of the $1.0940 area, which holds the (50%) retracement of the decline since the post-Covid peak on January 6, 2021 (~$1.2350). There are also about 1.25 bln euros in options at $1.0950 that expire today. The euro's pullbacks are still being snapped up and the intraday momentum indicators suggest a new high is possible in the North American session today. The Sterling extended yesterday's recovery, but the buying enthusiasm is not quite the same as for the euro. Buying continues to appear to dry up in front of $1.2450. Still, the market has not given up and looks poised to challenge the upside again today. South Africa's central bank is seen hiking its repo rate 50 bp (to 7.50%) today, following three 75 bp moves.
 

America

Remember all those narratives built around the alleged decline in demand for US Treasuries? It led some to even suggest it was a sign that the dollar was being eclipsed on the global stage. Foreign investors, including central banks, were divesting, we were told, and the lack of demand could even prompt the Fed to renew their bond purchases to help stabilize the market. Not so fast. Yesterday was the seventh auction of the year and they have been well received, with strong bid-covers and generating a yield that was below where the instruments were trading in the when-issued market. Moreover, like in yesterday's sale of $43 bln of five-year notes, primary dealers have not had to buy very much. They took 8.8% at yesterday's sale, a record low. Today, the Treasury is back with $35 bln in 7-year notes and $135 bln of bills (4- and 8-week) for sale. After today's 7-year note sale, the next coupon offering ae three-year note on February 7. 

The US economic diary is jammed today. The headlines will be about Q4 GDP. Market economists see growth moderating after the 3,2% annualized pace in Q3. The median and average in Bloomberg's survey are 2.6%. Of the 70 economists survey almost 20% project growth of more than 3%, including three of the top 10 GDP forecasters. We have suggested that just like the market looked past the contractions in Q1 22 and Q2 22, they are looking through the growth in H2 22. Despite the soft-landing meme, many economists still see downside risks. The median forecast for this quarter in Bloomberg's monthly survey is no growth and a 0.6% contraction in Q2. The other December data due out will be overshadowed by the GDP. Weekly initial jobless claims may attract some intention, though they are reported at the same time as the GDP figures, given last week's unexpected drop below 200k. 

Given the somewhat more dovish than expected Bank of Canada and the early weakness in US equities, the Canadian dollar was resilient. The greenback bounced to almost CAD1.3430 from around CAD1.3360 before the announcement. Governor Macklem's pauses, conditional on the economy evolving as the central bank expects, it was clear that the bias was that it would stand pat. It was the eighth consecutive hike, and the quarter-point hike puts the overnight cash target at 4.5%. The Bank of Canada expects, as the market does, a marked slowdown. Macklem did not push back against questions about a cut very forcefully, like the Fed. Instead, he said it was too early to discuss. Canada would be the first of the G7 central banks to reach the end of the cycle, though among the G10, the market suspects Norway may also be done. The BOC expects inflation to fall back into the 1%-3% "control range" by mid-year and 2% next year.

The Canadian dollar is trading quietly within yesterday's range (~CAD1.3340-CAD1.3430). Near CAD1.3390, it is virtually unchanged this week. While the Canadian dollar's correlation with US equities (as a risk currency) has lessened, its general underperformance in a soft US dollar environment continues. This year, so far, it is the weakest of the dollar-bloc currencies, up about 1.25%. The Australian dollar leads the G10 with a nearly 4.5% advance and the New Zealand dollar has risen by about 2.15%. The greenback is little changed against the Mexican peso as it hovers around MXN18.80. Recall last week, the dollar jumped from around MXN18.5665, its lowest level since March 2020, to nearly MXN19.11. It has stalled now after meeting the (61.8%) retracement objective around MXN18.77. Lastly, we note that the central bank of Chile meets late today and is expected to stand pat with its overnight target rate at 11.25%. It has held steady since the 50 bp hike last October.

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