Capital Markets Show Signs of Stabilization Amid Mixed Economic Signals

Market Overview

The pervasive anxiety that had dominated capital markets showed signs of easing today. Equity markets advanced, supported by renewed buying interest following sharp declines in gold and silver. The US dollar softened slightly across most pairs; however, its upward correction phase appears to be ongoing. Emerging market currencies generally strengthened, with the Indian rupee notably gapping higher after the announcement of a trade agreement with the United States. Meanwhile, a partial US government shutdown is impeding the release of key economic data, including today’s JOLTS figures and the upcoming nonfarm payrolls report.

Central Bank Actions: Reserve Bank of Australia Leads with Rate Hike

The Reserve Bank of Australia (RBA) took the lead among G10 central banks by raising its overnight cash rate by 25 basis points to 3.85%. Although the RBA adopted a cautious tone regarding the economic outlook, its forecasts assume an additional rate increase later in the year—expectations that the market has largely priced in by mid-2025.

G10 Currency and Bond Market Developments

Euro Movements

The euro experienced selling pressure, declining to $1.1780 during North American trading yesterday before partially recovering to near $1.1825 in late Asia-Pacific session. It weakened again in European trade, reaching session lows of approximately $1.1785. Technical considerations include the 61.8% retracement of its rally from the January 19 low (around $1.1575) at $1.1765, and the 20-day moving average close to $1.1750. Daily momentum indicators are turning downward, indicating the correction may deepen.

US Dollar versus Japanese Yen

The US dollar recaptured the gap against the Japanese yen created by the sharp decline in last Monday’s opening, filling the range between JPY155.30 and JPY155.65. The dollar’s high yesterday reached JPY155.80, marginally above the 50% retracement of the January 23 decline from its high near JPY159.25. Today’s European session high climbed to nearly JPY156. The next technical target lies close to JPY156.50 with the 20-day moving average around JPY156.60. Although daily momentum indicators are overextended, they appear poised for a further upward move.

British Pound Dynamics

Sterling encountered selling pressure, dipping slightly below $1.3625 yesterday. The midpoint of its rally from the January 19 low near $1.3330 to last week’s high around $1.3670 lies near $1.3600. Although the currency improved above $1.3700 today, renewed selling drove it back near $1.3650. The next retracement target is roughly $1.3535, with the 20-day moving average near $1.3640. Momentum indicators suggest further downside potential as they remain stretched and appear ready to turn lower.

US Dollar against Canadian Dollar

Following an outside up day against the Canadian dollar before the weekend, the US dollar extended its upward correction by breaking above CAD1.3700 yesterday, nearing the 50% retracement of the decline from the January 16 high (~CAD1.3930). The greenback is consolidating near the upper range of yesterday’s trading. The next retracement point is roughly CAD1.3760 with the 20-day moving average slightly higher at CAD1.3770. Momentum indicators remain overextended without confirming a complete upward turn.

Australian Dollar Response to RBA Hike

The Australian dollar was sold down to approximately $0.6910 yesterday, reaching a four-day low amid anticipation of the RBA’s rate decision. Following the 25 bp hike announced today, the Aussie surged to $0.7050 before retracing back near $0.7000 in early European trading. The currency may find near-term support around this level with potential recovery during the North American session. Nonetheless, momentum indicators are turning downwards, cautioning the possibility of deeper short-term losses.

Emerging Market Currency Performance

Colombian Peso Leads EM Gains

The Colombian peso was the top performer among emerging market currencies, rallying approximately 2.25% after an unexpected 100 basis point hike in its overnight lending rate to 10.25%. This figure stands remarkably high relative to year-end CPI near 5.5%. The January inflation report is expected by week’s end.

Chilean Peso and Mexican Peso Movements

Stronger-than-expected December economic activity in Chile supported a roughly 1% appreciation in the Chilean peso. The Mexican peso demonstrated resilience, with the US dollar retreating from MXN17.5725 to session lows near MXN17.3515 before consolidating around MXN17.40 during North American trading. Today, the dollar edged down to about MXN17.30 and maintained stability through the European session.

Chinese Offshore Yuan and Indian Rupee Dynamics

The US dollar declined against the offshore yuan, establishing a new low just above CNH6.93 after bouncing off the 20-day moving average near CNH6.96. The People’s Bank of China continues to gradually lower the dollar’s reference rate, which today was set at CNY7.9608—a level unseen since May 2023.

The Indian rupee strengthened by approximately 0.5% following higher interest rates post-weekend budget announcements and central bank interventions, ranking as the third strongest emerging market currency. The announcement of a US-India trade deal reducing tariffs from 25% to 18% intensified buying pressure, leading to a significant short squeeze that propelled the rupee about 1.35% higher today. The dollar tested key psychological support near INR90.00. The Reserve Bank of India is scheduled to meet on Friday with the key repo rate at 5.25%.

Equity and Commodity Markets

Equity Market Performance

Asian equity markets posted substantial gains, propelled by strong US equity rallies. The Nikkei and Topix advanced over 3%, South Korea’s Kospi surged 6.8%, and Indian shares rose beyond 2.5%. Indonesian equities, despite recent weakness, climbed approximately 2.5%, while China’s CSI 300 gained close to 1.2%. In Europe, the Stoxx 600 rose modestly after a one-percent increase yesterday. US S&P and Nasdaq futures are reflecting mild positive momentum.

Bond Yields and Commodity Prices

Benchmark 10-year government bond yields rose universally. Japanese and Australian yields increased by 2-4 basis points, while European yields ticked up 1-2 basis points. The US 10-year Treasury yield remains steady slightly below 4.29%.

Gold rebounded for the first time in three sessions after declining nearly 14% over that period, advancing just over 5% to slightly above $4,900 per ounce. Silver pushed higher by more than 8%, nearing the $86 level.

Crude oil (March WTI) recovered from previous losses, climbing to nearly $61.10 before advancing beyond $62.20 in late European morning trade.

Economic Data and Outlook

US Data Delays and Auto Sales

The partial US government shutdown has delayed the release of December JOLTS data. Attention now turns to January auto sales, which appear subdued. The fourth-quarter 2024 average seasonally adjusted annual rate stood at 15.65 million vehicles—the weakest quarter since Q3 2024. Despite tariffs and expiration of tax incentives, the 2025 average pace is estimated at 16.12 million units, compared with 15.77 million in 2024 and 15.43 million in 2023. Bloomberg’s median forecast anticipates a 15.30 million unit pace for January. Auto sales weakness is expected to weigh on January’s retail sales figures.

Mexican Manufacturing and Remittances

Following a public holiday in Mexico yesterday, the January manufacturing PMI is scheduled for release today. It is projected to rise from December’s 46.1—the lowest reading since last April—signifying a tentative end to a prolonged contraction. The January IMEF surveys are also forecasted to show slight improvement. December worker remittance data, Mexico’s primary source of hard currency inflows, is forthcoming. Year-to-date through November, remittance inflows slowed to approximately $56.5 billion from $59.5 billion during the same period in 2024. Remittances typically peak in December, with Bloomberg’s survey estimating $5.161 billion for December 2025, marginally up from November but below December 2024’s $5.223 billion.

Eurozone Inflation and Regional Data

Ahead of the preliminary January eurozone CPI release tomorrow, France provided early data showing a 0.4% month-over-month decline in consumer prices on the EU harmonized basis, resulting in a 0.4% year-over-year increase. This compares with December’s 0.1% gain and a 0.7% year-over-year rate. Germany reported a -0.1% monthly change and 2.1% year-over-year inflation last week, while Spain recorded a -0.7% month-on-month and 2.5% year-over-year rates.

Reserve Bank of Australia’s Hawkish Signals

The RBA delivered a 25 basis point rate increase amid robust recent economic data and hawkish central bank commentary. Market instruments price in nearly a 70% probability of this hike and approximately a 90% chance of at least one additional increase by mid-2025. The central bank’s macroeconomic forecasts underpin expectations of further tightening during the year.