Overview: 

After the making marginal new highs in early North America yesterday, the dollar pulled back, arguably dragged lower by the softness of US rates, helped by the sharp drop in oil prices and healthy reception to the US three-year note auction.

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However, the greenback has returned better bid today as the market continues to search for direction post-FOMC and US jobs report. The euro and sterling are the weakest of the G10 currencies through the European morning, in a day of light macro data. They are off 0.30%-0.40%. Most of the others are 0.1%-0.2% lower. The Russian ruble and Philippine peso are only emerging market currencies that are holding their own against the firm US dollar. 

Equities are softer. Nearly all the large markets but Taiwan, Australia, and India, moved lower in the Asia Pacific area, and Europe's Stoxx 600 is lower for the third consecutive session after rising every day last week. US index futures are lower. The S&P 500 has a seven-day rally in tow that is at risk. The Nasdaq has advanced for the past eight sessions. These are the longest rallies in a couple of years. European 10-year yields are narrowly mixed, while the 10-year US Treasury yield, ahead of today's $40 bln sale, is a few basis points firmer near 4.59%. Gold is consolidating inside yesterday's (~$1956.80-$1978.40) range. A convincing break of $1950 could spur a move toward $1935 and then $1900. December WTI is extending yesterday's 4.25% drop. It is nicked the 200-day moving average (~$76.75) for the first time since July. Chart support is seen around $75.

Asia Pacific

China will report October consumer prices and producer prices tomorrow. The median forecast in Bloomberg's survey is for a 0.1% decline after a flat September report. Food prices remain key. Still, when food and energy are stripped out, China's core inflation stood at 0.8% in September. Producer prices have been falling on a year-over-year basis without interruption since the beginning of Q4 22. The deflation slowed every month in Q3, with the pace slowing to -2.5% in September from -5.4% in June. The deflation in producer prices warns that profits remain subdued. Next week China reports October real sector data points, including industrial production, retail sales, fixed asset investment, property investment, and surveyed unemployment. The year-over-year rates are likely little changed, while retail sales may have improved. Will the PBOC allow for a reduction in the benchmark one-year Medium-Term Lending Facility rate (now stands at 2.50%) to complement the new fiscal efforts? It seems unlikely. Yesterday, the IMF announced it was boosting its projection of China's growth this year to 5.4% (from 5.0%) and next year to 4.6% (from 4.2%). It attributed the slower growth it anticipates for 2024 to the drag from the property market and weak foreign demand. - The IMF expects China's core inflation to rise to 2.1% by the end of next year.

Some more thoughts about China's reserves:  According to Brad Setser, from the Council on Foreign Relations and formerly at the US Treasury, the last time China revealed its dollar holdings was in a 2021 State Administration of Foreign Exchange annual report that cited a 2017 figure of 58%, the same as 2015. Even if that number was reliable then, there is no reason to assume that it is still valid given the numerous developments since then, including a marked deterioration of Sino-American relations, the expansion of the US sanction regime, and the weaponizing of the access to the dollar. China is the largest holder of reserves and at the end of 2017, the IMF estimated that collectively, the dollar accounted for about 62.7% of allocated global reserves. By the middle of 2023, the dollar's share had fallen to about 58.9%. As Setser notes, the self-disclosed China allocation to dollars was previously slightly below the IMF's aggregate estimate. 

Apparently, one can add up Euroclear and Clearstream Treasury and Agency holdings, as if they were all Beijing's, and make assumptions about how many of China's Treasuries (and Agencies) are held at the Federal Reserve in its custodian facility and arrive an estimate of what Setser calls "augmented reserves." If these assumptions are granted, Setser's conclusion is that for some unclear and uncharacteristic fashion, China underestimates its reserves and that it has not reduced its dollar exposure in the past six years. As we noted the other day, one can make the argument that the US also under-reports its reserves by not including SOMA (Fed account that holds foreign assets). Also, consider the plug factor--errors and omissions--in China's balance of payments. Since the end of 2017, China's balance of payments errors and omissions have totaled almost $710 bln. As we previously noted, this is thought to be capital flight. Over the same period (end of 2017 through mid-2023), the US errors and omissions on its Balance of payments was about $785 bln. But unlike China, US errors and omissions were positive, meaning unaccounted for inflows (demand for dollars).

Yesterday the dollar held to the tick the (61.8%) retracement objective of the losses seen since the JPY151.70 peak on October 31 in reaction to the BOJ found slightly above JPY150.65. Today, it has edged a little higher to almost JPY150.80. We note that the 10-year US Treasury settled yesterday below the pre-weekend close, unwinding Monday's bounce. Nearby resistance is now seen in the JPY151.00-10 area. The Australian dollar sold off hard yesterday, and in one fell swoop, retraced nearly (61.8%) of last week's gains. Still, after a marginal new session low in early North American trading just ahead of $0.6400, the Aussie clawed its way back to around $0.6440. It edged up to almost $0.6450 today before succumbing selling pressure and returning to almost $0.6420. A break of $0.6395-$0.6400 would disappoint and could spur a move toward $0.6365. The Chinese yuan four-day advance was snapped on Monday, and it has dribbled lower yesterday and is slightly lower today. The dollar has not taken out yesterday's high (~CNY7.2870). In fact, it remains within range set on Monday (~CNY7.2660-CNY7.2885). The fix was little changed at CNY7.1773 (CNY7.1776 on Tuesday and CNY7.1780 on Monday). The average projection in Bloomberg's survey was CNY7.2826 (CNY7.2849 yesterday and CNY7.2860 on Monday). 

Europe

The eurozone reported a 0.3% decline in September retail sales. The report tracks volumes not value. It was the third consecutive decline. Although the preliminary Q3 GDP estimate has been published (-0.1% quarter-over-quarter), the details are sparse, but the update next week will provide more color. The retail sales decline points to a likely contraction in consumption and recent reports suggest industrial output likely fell sharply in Q3. The ECB also published the results of its September survey of consumer CPI expectations. The median one-year expectation rose to 4.0% from 3.5% in August. This is the highest since April. The median three-year expectation eased was unchanged at 2.5%. Note that the median one-year expectation finished last year at 5.0% and the three-year expectation was at 3.0%. The preliminary October CPI stood at 2.9%. Given the base effect, this is likely the low print until next February-March.

The euro made a low in early North American turnover yesterday about 2/100 of a cent below the low set in the European morning to meet the (38.2%) retracement of last week's rally. That area held (~$1.0665) and the euro recovered and traded a little above $1.07 in the NY afternoon. Unable to sustain the push above $1.07, the euro has slipped back to $1.0660 in the European morning. The next area of support is seen around $1.0635-40. Sterling's pullback was a little deeper, but it held to the 1/100 of a penny the (50%) retracement of last week's rally, just above $1.2260. It also recovered and traded back above $1.2300. As was the case with the euro, sterling could not sustain the move above the figure and was sold to almost $1.2240. Support is seen in the $1.2200-20 area.

America

The US economic calendar is light today. Still, like yesterday's trade figures, today's wholesale inventories could impact expectations of Q3 GDP revisions. That said, the market is not focused on Q3 growth anymore, regardless of the precise pace. Instead, the key is Q4, and consumer demand in particular, which is why next week's retail sales are especially important. Five Fed officials speak today and what is striking is that all five officials are governors. Most notably, a little before the stock market main session begins, Chair Powell delivers opening remarks for the Fed's Division of Research and Statistics conference. Tomorrow afternoon the Chair speak participates on a panel at the IMF on monetary policy challenges in a global economy.

In the face of new reports of the dollar's demise (here), we note that the start of the US quarterly funding off swimmingly. Despite a lower yield, the and the increased size, the $48 bln three-year note drew a higher bid-cover and indirect bidders returned in size. Tomorrow, the US Treasury auctions $40 bln 10-year notes and $24 bln 30-year bonds on Thursday. Also, perhaps also pushing on rates was the dramatic drop in oil prices. The price of December WTI crashed by more than 4% yesterday to almost $77.25 a barrel. It is the lowest since late August and has taken out the 200-day moving average today near $76.75. While demand is the main concern, but new reports suggest Russian shipments seem to be continuing to run well above what one would expect if it were honoring the commitment to reduce exports by 300k barrels a day through the end of the year. OPEC+ meets on November 26 to set output targets for H1 24. Late yesterday, API estimated a nearly 12 mln barrel build of US commercial inventories.

The largest monthly trade surplus since mid-2022 could not prevent the Canadian dollar from retracing more than half of last week's gains yesterday. The US dollar pushed above that retracement (50%) near CAD1.3765 to reach almost CAD1.3785. The gains have been extended today to near the (61.8%) retracement near CAD1.3800. A move above CAD1.3815 would be disappointing. The greenback saw a three-day high against the Mexican peso, a little shy of MXN17.60 before sellers emerged to push it back to nearly MXN17.45. After the Russian ruble, the peso's roughly 0.35% gain put it at the top of the EM FX leader’s board. The dollar is trading firmer against the peso today but is holding below yesterday's high (~MXN17.5935).

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