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Overview: The dollar is bid going into the December jobs report. After selling off at the end of last year, it has recovered this week. The five-day moving average is crossing the 20-day moving average against several of the currency pairs, capturing the shift in momentum. The greenback's gains have as interest rates have jumped. The 10-year Treasury yield finished last year near 3.88% and is now near 4.04%. European benchmark rates have mostly risen 15-20 bp this week, though the 10-year Gilt yield is up almost 28 bp. The market has downgraded the odds of a March cut by the Federal Reserve to around 68% from 100% at the end of 2023. 

Stocks have been hit by profit-taking to start this year. China's CSI 300 and Hang Seng have fallen every day this week for about a 3% drop. Europe's Stoxx 600 is giving back yesterday's gains and is off a little more than 2% this week. US index futures are trading heavily, pointing to the fifth drop for the S&P 500 and the sixth consecutive fall for the Nasdaq. Gold is trading heavier. The yellow metal is trading lower for the fifth session in the past six as rising rates and a firmer dollar sap its recent strength. A break of the $2030 area could spur losses toward $2000-$2015. February WTI is steady in the $72-$73 range. It finished November near $76 and settled in December around $71.65.
 

Asia Pacific

Like the final manufacturing PMI, Japan's final service and composite PMI are not what moves the market. That said the composite PMI was revised to 50.0 from 50.4 on the back of the downward revision in the services component to 51.5 from 52.0. After contracting in by nearly 3% annualized in Q3, the Japanese economy is expected to have returned to growth in Q4 23, as consumption and private investment expand for the first time since Q1 23. Despite the seemingly widespread speculation that the BOJ will lift its negative overnight deposit rate from minus 0.1% in April, the two-year bond yields less than five basis points. The 60-day rolling correlation of changes in the exchange rate and the US 10-year yield is around 0.45, the upper end of where it has been in the past six months. The correlation between changes in the exchange rate and Japan's two-year yield is slightly below 0.25. 

China may post its December reserve figures over the weekend. A back-of-the-envelope calculation based on the dollar's decline and the rally in bonds, we estimate that China's reserves may have increased by around $50 bln. It would put the dollar value of its reserves near $3.22 trillion, up from around $3.13 at the end of 2022. All of China's foreign assets are not part of its reserves and this seems to be a common practice and is true of the US too. As China amply demonstrates it can manage the exchange rate without resorting to official intervention. The daily fix seems to us to be the most powerful tool within the context of moral suasion and implicit threats by officials. Every time there is a press report saying that the state-owned banks bought or sold dollars does not mean there was intervention. They handle commercial accounts, like other banks, of course. Moreover, if officials make it clear that they desire a stronger yuan, for example, and state-owned banks buy the yuan, that still does not make it an intervention. Recall that in September 2021, the Federal Reserve indicated that they would be raising rates in 2022. The market lifted the two-year yield by 50 bp before the FOMC moved. Surely, this was not considered an intervention. Perhaps with a greater or more credible threat of adverse official actions, the communication channel is powerful.

The fact of the matter is that many countries in East Asia have been reluctant to embrace fully floating exchange rates and have found different ways to mitigate the vagaries of the market. Interestingly, the Indian rupee and the Singapore dollar had lower actual (historical) volatility last year than the Chinese yuan (SGD ~4.5%, INR ~3.4%, and CNY ~4.7%). South Korea has a somewhat different challenge. It wants its equity market to be considered developed for index purposes, which would attract another segment of global investors, and to do so it must improve access. Next month, it will test a plan that will be implemented in H2 24 to extend the hours of trading the won by nearly 11 hours, which will correspond to the bulk of the US session. A couple of large banks are opting to boost staff in London and/or New York rather than extend the local staff coverage.

The continued rebound in US rates and what appeared to be option-related buying above JPY144 helped extend the greenback's recovery to JPY144.85 in the North American session yesterday and JPY145.35 today. It is the highest since December 13. The dollar has surpassed the (38.2%) retracement objective of the dollar's decline since the peak last November (JPY152). The next retracement (50%) is slightly above JPY146.00. The Australian dollar was turned back from the session high yesterday seen in the European morning near $0.6760. It was sold back below $0.6700 in the North American session and follow-through selling has pushed it to $0.6675. A break of the $0.6660 area could signal a push to $0.6600 and maybe $0.6550. Like the greenback's movement against the yen, the five- and 20-day moving averages are crossing today, reflecting reversal of the year-end rally. We have been monitoring the dollar's climb into the gap created in mid-December. The top of the gap is a little above CNY7.1700. The gap was closed today, and the dollar retreated to CNY7.15. The reference rate was set at CNY7.1029 (CNY7.0997 yesterday) and the average projection in Bloomberg's survey was for CNY7.1589 (CNY7.1488 yesterday). The dollar's rise this week of about 0.80% is the largest against the yuan in three months. Some reports attributed the yuan's late recovery today to state-bank buying.
 

Europe

The 0.2% monthly increase in the eurozone's December CPI puts the three-month annualized increase at an enviable 1.2% pace. The increase in the year-over-year rate to 2.9% from 2.4% reflects the base effect, which ECB President Lagarde warned of, relating to energy subsidies in late 2022. The core rate fell for the fifth consecutive month, and at 3.4% (from 3.6%), it is the lowest since March 2022. The November PPI fell (0.3%) for the first time since July. It is off 8.8% year-over-year and has not been positive since April. Growth is weaker in the eurozone, and inflation is lower than in the US, yet the market is pricing in the Fed to move before the ECB. The swaps market has slightly less than a 50% chance of an ECB cut by the end of Q1 and almost a 67% chance of a Fed cut. 

The euro rose a little above $1.0970 yesterday, and although it took out Tuesday's high, the tone was consolidative in nature. The high was recorded in the European morning in what seemed like position squaring, maybe from the interbank dealers who sold after the year-end rally. The euro is trading below yesterday's low (~$1.0915) but found support ahead of $1.09. Barring a significant surprise with the US jobs report, we expected the euro's downside correction to continue. The $1.0875-85 offers retracement targets, while the 200-day moving average is near $1.0845. The euro's five- and 20-day moving are also crossing today and the momentum indicators are falling. Sterling is holding in a bit better, but yesterday's impulsive gains seen in Europe carried into the North American morning before stalling. It peaked near $1.2730 and fell back to $1.2665 before trading broadly sideways. It is testing the $1.2650 area in the European morning, and the five-day moving average has crossed below the 20-day moving average. A break of $1.26 could open the door to another cent decline. 
 

America

The US jobs report is the first major data for a new month and is particularly difficult to forecast because of the absence of solid inputs. Yes, weekly jobless claims are something and so are the PMI and ISM surveys, but the relationship is loose at best. The four-week moving average of weekly jobless claims slipped a little from the BLS survey week in November to the survey week in December (8k).

Many seem to incorporate ADP private sector estimates into their expectations, though it is not particularly reliable, especially in the short-term. Through November, the ADP estimated that the private sector created 2.33 mln jobs in 2023. The BLS estimates that the private sector expanded its workforce by 1.91 mln. However, in the three months through November, ADP estimates nearly 300k private sectors jobs were created, while the BLS estimate is 50% higher at 435k.

The median forecast in Bloomberg's survey calls for 170k increase in nonfarm payrolls of which the private sector is seen expanding by 130k jobs. This compares with 199k and 150k respectively in November. Separately, it appears that withholding tax collection fell sharply in December, warning of downside risks today. The household survey, which generates the unemployment rate, is subject to the annual revision that goes back five years. The median forecast in Bloomberg's survey sees the unemployment rate ticking up to 3.8% from 3.7% in November. It had reached 3.9% in October and finished 2022 at 3.5%. A 0.3% increase in average hourly earnings would translate into a 3.9% year-over-year rate, the first sub-4% print since June 2021.

Canada's labor market conditions have eased faster than in the US. The unemployment rate has risen from 5.0% at the start of last year to 5.8% in November and is projected to have risen to 5.9% last month. The participation rate has risen slightly from 65.3% in November 2022 to 65.6% this past November. Yet, job creation has held up. Consider that it in the first 11 months of 2023, Canada created 430k jobs of which almost 350k were full-time positions. Job creation in the same period in 2022 was 340k and 375k, respectively (part-time positions were lost in 2022 or became full-time posts). Meanwhile, wage growth (average hourly wage, permanent workers) has remained robust. It rose by 5.05% year-over-year in November after finishing last year with a 4.70% increase. The median forecast in Bloomberg calls for a 5.4% increase last month, which would be the most since November 2022. The swaps market has about a 30% chance of a Bank of Canada rate cut discounted by the end of Q1 compared with a nearly 70% chance of a Fed cut.

The US dollar was confined largely to Tuesday's range against the Canadian dollar (~CAD1.3315-CAD1.3370). The market lacked conviction and it settled practically flat yesterday. That said, the technical indicators warn that the greenback's upside correction after its sharp fall over the past two months has more room. It is trading near CAD1.3380 in Europe. A bottoming pattern may be forming that could signal a move toward CAD1.3450-CAD1.3500. The Mexican peso also went virtually nowhere yesterday and was mostly within 0.33% of Wednesday's settlement. It is little changed today. There may be near-term potential toward the MXN17.15-17 area. Another drop in the core CPI next week could fuel expectations of a Banxico rate cut here in Q1. 

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