Dollar Shows Mixed Performance as North American Trading Begins

The U.S. dollar is experiencing a mixed session as the final North American trading day of the week commences. Following the expected decision by the Bank of Japan (BOJ) to maintain interest rates, the yen exhibited notable volatility, sparking speculation about potential intervention. While significant intervention seems doubtful, increased verbal warnings and possible checking of market rates by officials cannot be ruled out. Meanwhile, the People’s Bank of China (PBOC) notably fixed the dollar’s reference rate below the CNY 7.00 threshold for the first time since 2023, marking a psychologically important level.

In U.S. political developments, former President Trump is anticipated to announce his nominee for Federal Reserve Chair in the near term. The continuation of Powell’s term as Fed Governor beyond May remains uncertain and is unlikely to be disclosed imminently. The Federal Open Market Committee (FOMC) is scheduled to meet next week, where a decision to maintain current policy is expected to generate less debate than last month’s rate cut.

On the fiscal front, the Republican-led House of Representatives passed a federal government funding bill covering the remainder of the fiscal year, incorporating some resistance to the president’s agenda. The Senate is expected to pass the bill, and the president is likely to sign it, thus averting a government shutdown at the month’s end.

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G10 Currency Overview

Euro

The euro staged an outside up day yesterday, trading on both sides of Wednesday’s range and closing above its high. From a technical perspective, a close above last week’s peak at approximately $1.17 would constitute an outside up week. The euro approached nearly $1.1760, slightly below Tuesday’s high near $1.1770. Currently, it has dipped just under $1.1730 amid consolidative trading. However, momentum indicators suggest potential for a rebound during the North American session.

Japanese Yen and Dollar vs. Yen

The dollar momentarily reached a six-day high near JPY 158.90 before retracing lower. Options contracts valued at $1.7 billion struck at JPY 159 expire today. Subsequent to the BOJ’s hold on rates, the dollar surged to nearly JPY 159.23 before falling sharply to a low around JPY 157.35, the weakest level since January 8. While there is speculation about intervention, substantive action appears unlikely. Instead, a combination of forceful verbal guidance and rate monitoring seems more probable. The dollar briefly breached the 20-day moving average near JPY 157.55 but was trading near JPY 158.25 in late European morning hours.

British Pound Sterling

Sterling held above Wednesday’s low near $1.3400 before rallying to a two-and-a-half-week high slightly above $1.3500, coinciding with the expiration of approximately GBP 380 million in options at $1.3495. Today, sterling extended gains to about $1.3535, marking its strongest level since January 6. The high earlier this month was just under $1.3570, the strongest level since the day following the Federal Reserve’s initial 2025 rate cut. Daily momentum indicators suggest upward momentum may be building.

Canadian Dollar

The greenback posted an outside day against the Canadian dollar but did not close below Wednesday’s low around CAD 1.3785, although it remains heavy. It has stayed beneath CAD 1.3800 and above CAD 1.3780 so far today. The next technical retracement levels are near CAD 1.3750 and CAD 1.3710. Momentum indicators have turned lower. The five-month low recorded last month, just below CAD 1.3645, appears to be a plausible target within the next couple of weeks.

Australian Dollar

The Australian dollar, one of the strongest G10 currencies at the start of the year, rose in response to stronger-than-expected employment data and heightened speculation of an interest rate cut as soon as next month, reaching nearly $0.6645 yesterday and extending to $0.6655 today. This is the highest level since October 2024. However, technical indicators such as the Bollinger Bands show the currency as markedly overbought, having settled more than three standard deviations above its 20-day moving average—the most extreme overbought reading in years. The three-standard deviation threshold is near $0.6860 today, while the traditional Bollinger Band is just above $0.6810.

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Emerging Market Highlights

Mexican Peso

The dollar remained close to a year-and-a-half low against the Mexican peso, reaching MXN 17.4225 yesterday but failing to extend below MXN 17.4380. Today’s low ticked slightly lower. The next key support level is around MXN 17.38. Daily momentum appears stretched but has yet to reverse positively.

Chinese Yuan

In a significant monetary policy development, the PBOC fixed the dollar’s reference rate below the crucial CNY 7.00 level at CNY 6.9929, down from CNY 7.0019 yesterday. This marks the largest single-day downward adjustment since August of last year and carries notable psychological importance. While some state-owned banks have somewhat supported the dollar as it declined, this dynamic is considered secondary to the primary significance of the official fix.

Indian Rupee

The Indian rupee remains under downward pressure. Foreign investors have sold approximately $3 billion in Indian equities year-to-date, with a modest purchase of just over $200 million in Indian bonds. The Reserve Bank of India’s foreign reserves climbed by $14 billion last week to $701.4 billion, signifying intensified intervention efforts—the largest weekly increase since March of last year. Despite these efforts, the dollar reached a new high near INR 91.97 today.

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Other Market Developments

Asia-Pacific markets mostly advanced today, with the notable exception of India. Europe’s Stoxx 600 surged 1% yesterday, registering its largest gain since November, though it is experiencing a minor pullback this morning. U.S. futures have softened, erasing some of yesterday’s gains.

The Japanese 10-year Government Bond yield edged up by a single basis point today but is down one basis point on the week. Long-dated Japanese yields for 30- and 40-year maturities declined for a third consecutive day, although they remain 13-15 basis points higher over the week. European 10-year benchmark yields show a mixed picture, generally rising between 4 and 7 basis points this week. Greece’s 10-year yield advanced 16 basis points on the week despite a slight dip today. The U.S. 10-year Treasury yield eased slightly below 4.24%, up 1.5 basis points for the week.

Gold hit a record intraday high near $1,967.35 before retreating to around $1,920 in late European session trading. Silver also set a near-record close to $99.40 and is holding value better than gold, currently slightly below the $99 mark. March West Texas Intermediate crude oil remains firm near $60.40, trading within yesterday’s range of roughly $58.95 to $60.80.

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Key Economic Data and Forecasts

United States

The Atlanta Fed’s GDPNow tracker estimates fourth-quarter GDP growth at 5.4%, following an upward revision of third-quarter GDP to 4.4% from 4.3%. Fiscal stimulus via tax cuts and refunds is expected to support economic momentum into early 2025. Preliminary January purchasing managers’ indices (PMI) are forecast to show slight improvements in manufacturing and services, pushing the composite PMI up modestly to 53.0 from 52.7 in December, which itself came after two months of softness. The final University of Michigan consumer sentiment survey is also due this week, though market focus tends to lie with the preliminary release.

Canada

Canadian retail sales data for November is anticipated to report a 1.2% increase, according to consensus forecasts averaged by Bloomberg. This rise would compensate for declines in September (-0.9%) and October (-0.2%). Growth is expected to be broad-based, with sales outside of autos providing the majority of the increase. A 1% gain in auto sales is expected, offsetting previous declines in the category.

Mexico

Mexico will release its IGAE economic activity index for November, a monthly proxy for GDP. After an October increase of nearly 1%, the largest since July 2024, November’s growth is forecast to slow considerably, with an anticipated increase just above 0.1%.

Eurozone

Preliminary January PMIs for the euro area showed a mixed performance, with manufacturing strengthening and services weakening. The composite remained steady at 51.5, following six months of increases through November before easing in December. November’s figure (52.8) represented the highest since April 2023. Although manufacturing PMI firmed, it stayed below the 50 threshold separating growth from contraction—its peak was 50.7 last August. Services PMI declined slightly to 51.9 from 52.4. Germany’s composite PMI fell in November and December but rose to 52.5 in January from 51.3. Conversely, France’s composite PMI slipped to 48.6 in January following 50.0 at the end of 2024 and 47.5 in November.

United Kingdom

The UK reported a 0.4% increase in December retail sales, rebounding after a 0.1% decline in November. The median survey forecast had predicted flat sales. Economists anticipate UK economic growth of roughly 0.1% for the fourth quarter, mirroring Q3’s performance. The preliminary January composite PMI improved to 53.9 from 51.4, surpassing last year’s high of 53.5 set in August. Political developments include a potential Labour leadership challenge to Prime Minister Starmer, with Manchester Mayor Andrew Burnham reportedly preparing to contest a soon-to-be vacant parliamentary seat within the area, which could provide a platform to challenge Starmer’s leadership.

Australia

Australia’s flash composite PMI for January surged to 55.5 from 51.0 in December, reaching last year’s peak recorded in August. However, strong labor market data combined with hawkish commentary from central bank officials have heightened market expectations for a rate hike as soon as the early February policy meeting. Futures market odds have more than doubled this week, rising from about 25% to nearly 60%.

Japan

December consumer price inflation softened to 2.1% year-on-year from 2.9%, while the core measure declined to 2.4% from 3.0%, aligning with forecasts and the earlier Tokyo CPI report. Preliminary January composite PMI improved to 52.8 from 51.1 in December. Revised BOJ forecasts indicate an expectation of better growth for the current and next fiscal years, along with upward adjustments to core inflation projections. BOJ Governor Ueda highlighted spring wage growth as a critical factor for upcoming policy decisions and expressed openness to modifying bond purchase programs in response to recent yield surges. Finance Minister Katayama employed cautious language signaling an escalation in verbal intervention regarding the yen, citing “a sense of urgency” in monitoring currency movements.

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**Disclaimer:** This report is intended for informational purposes and does not constitute investment advice.