Overview: The combination of the volatility and a large number of central bank meetings have exhausted market participants, and the holiday phase appears to have begun. Equities are under pressure following the sell-off yesterday in the US. Japan, China, and Hong Kong suffered more than 1.2% losses, while Australia, South Korea, and Taiwan posted minor gains. It was the fifth loss in the past six sessions for the MSCI Asia Pacific Index. Europe's Stoxx 600 is off around 0.7% today, which is sufficient to put into the red for the week. US futures point to a softer opening. The debt market is quiet. The 10-year yield is little changed at 1.42% and is practically flat on the week. European yields are slightly softer and are 2-6 bp higher for the week. UK Gilts yields are slightly firmer.

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The dollar is mostly firmer, with the yen and Swiss franc showing an iota of resilience. Emerging market currencies are mostly narrowly mixed, +/- 0.25. The notable exception is the Turkish lira, which continues to be shunned. Its 4%+ drop today brings the loss for the week to a dramatic 15%. The JP Morgan Emerging Market Currency Index is off for the fifth consecutive day (-0.25%), which brings this week's loss to almost 1.6%. The Russian rouble initially strengthened to new highs for the session in response to the central bank's 100 bp hike that was widely anticipated. It quickly gave it back amid speculation that the central bank may pause now. Gold's recovery continues, as does the crypto sell-off. In its third consecutive advancing session, the yellow metal has pushed above $1800. The next target is near $1815. January WTI is retracing most of yesterday's 2% advance and today's pullback puts it back into losing territory for the week. Last week, it settled slightly above $71.65. US natural gas is off around 2% today to bring the week's loss to 6% and the month's slide to more than 33%. European gas (Dutch benchmark) gives back nearly half of yesterday's 9% gain, leaving it up 22% on the week and more than 40% on the months after rising almost 30% last month. Iron ore prices are firm, gaining 2.2% after yesterday's nearly 4% gain. It is up over 10% this week and around 30% in the five-week rally. Copper is around 0.5% higher, after snapping a five-day slide with a nearly 3% rally yesterday. It is up almost 0.9% for the week after a 0.4% gain last week.

Asia Pacific

As widely expected, the BOJ stood pat and extended aid for smaller businesses for another six months. It indicated that it would stop its corporate bond-buying at the start of the new fiscal year in April. Japan's low inflation gives the central bank more flexibility than other leading economies. BOJ Governor Kuroda estimated that Japan's CPI is around 0.5% when stripped of the distortions. 

The US added 34 Chinese entities to its "blacklist" and will block US investment in another eight Chinese tech firms for their role in surveillance minorities. Meanwhile, there is speculation that after a little more than a year and a half, the PBOC could cut the 1-year and 5-year loan prime rates (3.85% and 4.65%, respectively) on Monday. Also, note that starting January 1, ex-pats in China will be taxed on their extensive benefits (e.g., housing, education, transportation). Some estimates suggest this will boost the tax burden by 20-40% for the roughly 850k ex-pats (excluding people from HK, Macau, and Taiwan). Businesses are objecting and are expressing concern about retaining and attracting talent.

The dollar gained against the yen in the first part of the week and pared the gains since the Fed's announcement on Wednesday. It is slightly lower on the day and somewhat higher on the week, having settled near JPY113.45 last week. A large option struck at JPY11.75 for $2.2 bln that expires today. The Australian dollar's rally stalled yesterday near $0.7225. It has been sold back to around $0.7155 today after settling yesterday near $0.7185. The Aussie is little changed for the week after settling around $0.7125 last week. Meanwhile, the US dollar is firm against the Chinese yuan. It did not fall for a fourth consecutive session. Recall that after slipping slightly on Monday, the dollar closed virtually unchanged for the past three sessions, and it is at new highs for the week today near CNY6.3780. The PBOC set the dollar's reference rate at CNY6.3651 compared with the median forecast (Bloomberg survey) of CNY6.3642. v

Europe

Unlike most central banks, the Bank of England appears to almost purposely keep the markets wrong-footed. To be sure, it is not just Bailey, though last month's inaction and yesterday's move will add the legend, the last two BOE governors had similar episodes. The 15 bp hike brings the base rate to 0.25%. The market has almost 20 bp discounted for the February move. Recall the significance of the 50 bp base rate. It would signal that the BOE would stop reinvesting maturing proceeds, signaling a tighter stance than just rates and earlier in the cycle. Note that despite the hiking talk before the bond-buying was completed, the BOE finished on Wednesday.

The surge in the virus did not impact yesterday's monetary policy decision, but it may still influence fiscal policy. Chancellor of the Exchequer Sunak is cutting short a business trip (to the US) and returning to the UK to address the cries of businesses seeking more assistance. The political pressure on the Johnson government is mounting, and as the polls indicated likely, the Tories lost a "secure" seat in North Shropshire yesterday. Meanwhile, November retail sales came in better than expected, rising 1.4%, the best since April, and the October series was raised to show a 1.1% increase rather than 0.8%. The year-over-year pace rose to 4.7%, the best since June. However, yesterday the BOE shaved its Q4 GDP by 0.5%.

The ECB's decision yesterday was more nuanced. Most comments focused on three aspects of its decision. First, the ECB confirmed that the emergency bond-buying would stop in March. It would slow the purchases in Q1. Second, the Asset Purchase Program, which existed before the pandemic, would double to 40 bln euros in Q2 and slow by 10 bln euros a quarter through Q3. It would remain at 20 bln euros a month, open-ended, until just before the first rate hike, which President Lagarde says is unlikely next year. Third, while the updated forecasts showed CPI at 3.2% (1.7% in the September iteration) next year, the 2023 and 2024 forecasts put CPI at 1.8%, importantly below the 2% target. 

The euro seemed to shrug off news that the Germany IFO survey was weaker than expected. The assessment of current conditions was downgraded, and expectations were diminished, leaving the overall business climate at 94.7 (down from 96.6). It is the weakest since February. The euro is in a narrow range, roughly between $1.1315 and $1.1350. There is are options for 2.6 bln euros at $1.13, but with a light US calendar and pre-week/pre-holiday energy levels, it may not be threatened. According to Bloomberg, the euro has finished the past three weeks between $1.1313 and $1.1317. Sterling is heavy after yesterday's run-up. Two large options may mark today's range. The first set is for GBP1.24 bln at $1.3350 (today's high so far is slightly below $1.3340). The second set is at $1.3250 for GBP1.5 bln (today's low so far is near $1.3280). 

America

Yesterday's slew of US data leaves today's calendar light. Of note, the Fed's Waller will be the first official to speak since the conclusion of the FOMC meeting and Powell's press conference. Meanwhile, it seems clearer that the Biden administration's "Build Back Better" initiative will be pushed back into next year.

The US-Canadian relationship is strained. It was so under the previous administration, and it remains so now. There are several issues of contention: the doubling of the US softwood tariff on Canada, the US ban on potatoes from parts of Canada, the protectionist elements in the "Build Back Better" bill, and especially the tax break for electric vehicles that are made in the US, and Canada's push for a digital tax (still). In addition, reports suggest that several Canadian ministries (trade, finance, and procurement) have been given mandates to toughen their negotiating position with the US.

Mexico surprised the market as outgoing Governor Diaz engineered a 50 bp hike. The one monetary policy committee member that has objected to the previous hikes dissented in favor of a 25 bp move. The central bank now sees inflation converging with the 3% target by Q4 23. However, the 50 bp move has not satisfied the market where the swaps market prices in nearly another 100 bp over the next three months. The next meeting that sees Ceja, the deputy finance minister, takes over at the helm is on February 10. Colombia is the last central bank meeting this week, and it is expected to hike the repo rate 50 bp to 3.0%. It delivered its first hike this year in October for 75 bp.

The US dollar has steadied after falling for the past two sessions against the Canadian dollar. Yesterday's low was near CAD1.2765, and today the greenback is pushing above CAD1.2800, where there are almost $585 mln in expiring options. Options for around $830 mln are struck a CAD1.2850. The US dollar finished last week close to CAD1.2720. The greenback is also confined to a narrow range near yesterday's lows against the Mexican peso. The 50 bp hike by Banxico may have restored some goodwill for the central bank. Initial resistance is seen near MXN20.90. However, the peso may need an environment of stronger risk appetites to extend its gains. Support for the greenback is seen near MXN20.70.