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The stronger-than-expected US employment report reinforced the "American exceptionalism" meme and sent the greenback to new highs against most of the G10 currencies. The derivatives markets pushed out the next Fed cut into September. By then, the swaps market has the European Central Bank cutting by nearly 100 bp, the Bank of England by 40 bp, and the Bank of Canada by nearly 50 bp. By the end of Q3, the swaps market has priced in 40 bp increase by the Bank of Japan. The US dollar was unable to sustain its initial momentum suggesting that much news has already been discounted. Nevertheless, there is no compelling sign that an important dollar high is in place. 

In fact, next week's data may push in the same direction. Headline US CPI and PPI are expected to be firm and retail sales and industrial production likely improved sequentially. Amid reports that the Bank of Japan may revise up its inflation forecast when it meets later this month underscores the importance of the deputy governor's speech on January 14. Sterling fell by more than 1% for the second consecutive week. Since the end of Q3 24, it has only risen in three of the 14 weeks. While the year-over-year CPI may be flat around 2.6%, services and core may soften, while the real sector data may improve. This includes, perhaps, an increase in November GDP, after contractions were reported in September and October and December retail sales (reported in volume terms) may have improved from the 0.2% gain in November. Beijing will try to take some pressure off the yuan by mopping up liquidity in Hong Kong but a large sale of bills. 

United States: After pivoting with a 50 bp rate cut in September to deter further deterioration in the labor market, the Federal Reserve signaled a re-focus on its price stability mandate at last month's FOMC meeting and underscored by the Summary of Economic Projections. That makes the highlight of the week ahead the December CPI on January 15. Headline CPI is expected to have risen by 0.3% in December, the same as in November, and given the 0.2% rise in December 2023, the year-over-year rate will likely edge up to 2.8% from 2.7%. That would be the highest reading since last July. The core rate is seen rising by 0.2%, which will allow the year-over-year rate ease to 3.2% from 3.3%. That would match the print of the year seen last July and August. The base effect warns that US consumer inflation will likely moderate in Q1 25. In Q1 24, headline CPI rose at an annualized pace of 4.4% and the core 4.8%. In Q1 25, the annualized rate may be closer to 3.5% and 3.6%, respectively. Real sector data in the week ahead includes December retail sales, industrial production, housing starts/permits, and inventories. Retail sales likely were lifted by auto sales, and perhaps efforts to front-run the expected rise in tariffs. Manufacturing was the likely driver of the modest gain in industrial output but constrained by the warm weather in most of the country that limited utility demand. Economic activity appears to have moderated in Q4 but is still seen above trend. Atlanta Fed's GDP tracker puts it at 2.7%. There is practically no chance that the Federal Reserve will cut rate at the meeting later this month. Still, the bar a rate cut late this month is very high. In fact, the Fed futures do not have fully discounted until September. 

The stronger than expected US employment data sent the greenback higher. The Dollar Index reached almost 110.00. It ended last year around 108.50. A move above 110.00 could spur a move toward 111.00-20. That said, there are two yellow flags. First the Slow Stochastic, a momentum indicator, has turned down, not confirming the move to new highs. Second, the Dollar Index is fraying the upper Bollinger Band, which came in near 109.80 ahead of the weekend. Initial support may be in the 109.00-20 area. 

Eurozone: If the bar to a Fed cut this month is high, it is for all practical purposes seen as a done deal for the European Central Bank, even after the third consecutive rise in the headline CPI reported last week for December. Growth impulses remain faint, and eurozone inflation is likely to moderate after rising this month. Recall that in the February-April period last year, headline inflation rose at an annualized pace of 8%. The median forecast in Bloomberg's survey sees Q4 growth at 0.2%, slightly lower than the average of the first three quarters. The 0.3% rise in November retail sales reported last week signals consumption may be holding its own (consumption is seen rising 1.1% in Q4 24 after increasing by 1.0% in Q3 24 and 0.5% in Q2 24. Gross fixed capital formation is an important drag. It appears to have fallen in every quarter last year. Net exports continue help boost activity. December trade figures are due January 16. The eurozone's trade surplus through November stood a little above 159 bln euros compared with almost 40.9 bln in the first 11 months of 2023. Still, note that the eurozone's trade surplus in the January-November 2019 period before the pandemic, Russia's invasion of Ukraine, and the China-shock, the eurozone's trade surplus was almost 217 bln euros. 

The euro made a marginal new low in response to the US report. It fell to $1.0215. The January 2 low was about $1.0225. There are 2.3 bln euro in options struck at $1.02 that expire on Monday. After the low was recorded, the euro bounced to about $1.0275. A break of $1.02 would seem to remove the last important technical support ahead of parity. 

China: The Chinese yuan is not particularly sensitive to macroeconomic data. The exchange rate is actively managed to achieve stability, especially against the dollar. Despite tariffs and sanctions from the US, Europe, and several emerging market countries taking anti-dumping actions, China may report a record trade surplus in December of over $100 bln. Many Chinese companies are already engaged in offshoring production, as the US did, and Japan was forced to after the Plaza Agreement. China's trade figures may be the most politically sensitive, but the other real sector data are likely to show the impact from the numerous stimulative measures unveiled in recent months. Growth in Q4 may rival the best in two years (1.8% quarter-over-quarter in Q1 23). That mean that on year-over-year basis, China will report 2024 GDP "around 5%". Of note, given the general perception of weak Chinese consumption, retail sales are seen rising by 3.5% year-over-year in December. US retail sales, which will be reported several hours before China's, rose by about 3.3%, in the year through November.

The strength of the dollar appears to be causing some consternation in Beijing. The PBOC is selling bills in HK and will pause its bond buying program. The dollar continues to bump along the upper end of the 2% band (around the reference rate) that China allows. PBOC actions are not preventing the yuan's depreciation, but it is moderating it. This can persist for a while, even if it is not sustainable in the long run. The dollar reached CNY7.35 in 2023. But assuming the dollar's broad uptrend is intact, there may be potential toward CNY7.50. 

Japan: The yen is more sensitive, by which we mean, is more correlated with US interest rates than Japanese interest rates. Consider the short end first. Over the past 60 days, the correlation between changes in the exchange rate and the two-year US note yield is slightly below 0.50. The low was in May near 0.42 and high was in November around 0.72. Last April, saw the extremes in the 60-day rolling correlation between the exchange rate and the two-year JGB yield:  -0.32 to 0.25. Turning to the longer-end, the correlation between changes in the exchange rate and the 10-year JGB yield was -0.30 in early March 2024 and peaked in August near 0.35. The correlation of changes in the exchange rate and the US 10-year Treasury yield slipped below 0.40 in May 2024 and peaked last year near 0.77. What about the correlation with the 10-year yield differential? The rolling 60-day correlation low in 2024 was set in early August near 0.32 and the high was set in early November slightly below 0.75. Japan reports December PPI on January 16 but is unlikely to have much impact on expectations for the outcome of the BOJ meeting on January 24. The swaps market has about 10 bp discounted. Separately, Japan reports November current account balance, which typically (17 of the past 20 years) deteriorates from October. Despite the undervalued yen (on most metrics), Japan continues to run a trade deficit. Through October, its trade deficit in 2024 was JPY3.97 trillion (~$26.3 bln). In the first 10 month of 2023, the shortfall was JPY5.94 trillion. 

On the back of the jump in US rates after the employment data, the dollar rose to a new six-month high near JPY158.90. The dollar's rally was not sustained, and the lion's share of the gains were unwound. The dollar pulled back to almost JPY157.20, to set a new session low. On the top side, the JPY160 is of psychological importance. However the BOJ deputy governor is speaking on Tuesday, and the market may be reluctant to push yen lower ahead of it just in case a hike is signaled. The market has about 14.5 bp of a hike discounted for this month, up from 10 bp a week ago. 

Great Britain: Sterling and Gilts took a drubbing last week. It was not simply a function of a strong dollar. Nor was it a function of high-frequency data. Rather, it seemed to be a recognition of the vicious cycle:  the backing up of UK rates would weigh on household consumption as mortgage rates would rise. The slowing of the economy will translate into a larger budget deficit and undermines the credibility of the Labour government's fall budget, which was poorly received in the first place. The news stream may worsen in the coming days. Starting in the middle of the week, the UK's high-frequency data may weigh on sterling through the interest-rate expectations channel. First up on January 15 is the December inflation reading. After jumping from 1.7% in September to 2.6% in November, the UK's headline CPI is likely to have stabilized in December, and services inflation may soften slightly, though remains stick. Looking ahead, the base effect warns of a bounce back of headline CPI in January (January 2024, CPI fell by 0.6%), but then a sharp decline in February and March. The following day, the UK reports November GDP. The economy unexpectedly stagnated in Q3, and Q4 has begun with no positive momentum to speak of:  the monthly GDP contracted in September and October. A small increase is expected. At the end of the week, December retail sales are due. After falling by 0.2% in September and 0.7% in October, UK retail sales volume posted a weak recovery in November when it rose by 0.2%. Another small gain is likely in December. The Bank of England cut the base rate twice last year, and the market does not have this year's first cut fully discounted until May. and has almost 50 bp of cuts priced in for this year. 

The US jobs data hit sterling in an offered market, and the pound was pushed slightly below $1.22 for the first time since November 2023. It stabilized as dollar pulled back from its initial highs more broadly, but sterling encountered new offers near $1.2350. It settled for the second consecutive session below its lower Bollinger Band (~$1.2280 ahead of the weekend). The $1.2255 area corresponds to the (38.2%) retracement of sterling's recovery from the Truss-crisis record low in September 2022 (~$1.0350). The next big psychological level is $1.20, but the (50%) retracement target is a little below $1.1900.

Australia: The Australian dollar slumped 10.5% in Q4 24. The magnitude of its weakness may be a bit surprising given it did not reflect Australia's monetary policy or its expected trajectory. The Reserve Bank of Australia stood pat in 2024. At the end of September, the futures market was pricing in almost 80 bp of cuts in H1 25. Now there is about 50 bp of cuts discounted. The data highlight is the employment report on January 16. The Australian labor market held its own last year. In the first 11 months, job growth averaged almost 36k a month, of which 30.5k were full-time posts. In first 11 months of 2023, Australia created an average of nearly 40k jobs a month, of which 19k were full-time positions. The unemployment rate finished 2023 at 3.9%, and after rising to 4.2% in July, it eased by to 3.9% in November. This is notable as the participation rate has risen from 66.6% at the end of 2023 to 67.0% in November 2024.

The Australian dollar was sold to $0.6140 in response to the US jobs data, which was where the lower Bollinger Band was found. It is the lowest level since April 2020. It posted a large outside down week, ostensibly a bearish technical indicator, by trading on both sides of the previous week's range and settling below its low. The next chart support is seen near $0.6100 and the then $0.6000. It may take a move above $0.6200-20 to stabilize the technical tone. The Aussie has a four-day downdraft in tow to start the new week, but perhaps a better illustration of the pressure, it has fallen for the past six weeks, matching its longest losing streak in a decade. 

Mexico:   Mexico's economic diary is light of market-moving reports in the coming days. The peso began last week with a large rally but spent the past four sessions unwinding Monday's gain. The US dollar made a new high for the week near MXN20.70 after the US jobs report. It ultimately finished little changed on the week, while most of the other regional currencies managed to hold on to gains. The Brazilian real led the region with nearly 1.4% gain, which was also the best among emerging market currencies, save the Russian ruble. At the end of the week, Brazil's IPCA inflation was reported in line with expectations, a 4.83%, its first decline since last August. Still the risk-off ahead of the weekend, illustrated by the sharp losses in the US equities, weighed on emerging market currencies broadly. 

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