# United States
The US dollar is experiencing mixed movements as we head into the crucial employment report, which is expected to shape market sentiment. Recent statements from Federal Reserve officials underscore the significant hurdles that a rate cut would have to surpass this month. The next employment report will also feature the annual benchmark revisions. Sterling has been volatile, stabilizing recently but still down nearly 1% this week, marking it as the poorest performer in the G10. Contrarily, the Canadian dollar is the sole G10 currency to make gains against the US dollar, appreciating by approximately 0.25%. Emerging market currencies present a mixed picture, with Asia Pacific currencies outperforming Central European currencies. Notably, the Chinese yuan remains at the lower end of its band against the US dollar.
In the equity markets, the US stock market is experiencing downward pressure, having edged lower following the 5-4 Supreme Court decision yesterday, and President-elect Trump is facing sentencing in a New York court related to the “hush money” scandal. While the situation captures attention, its market impact is minimal. Both US and European equities have recorded modest declines. The benchmark 10-year US Treasury yield is slightly higher at 4.70%, up seven basis points for the week. On the commodity front, gold continues its upward trajectory for the fourth session, near $2680, marking its best performance since mid-December. February WTI crude is also seeing a surge, rising over 2% to a three-month high of around $75.80. Factors such as decreasing inventories, colder winter temperatures, and potential sanctions on Russia and Iran are driving this increase.
Regarding data, the Dollar Index has struggled to surpass the 109.40 level over the last couple of sessions, with markets adopting a cautious stance ahead of the upcoming jobs report. November saw a surprise dip in consumer credit, with revolving credit experiencing its largest drop since May 2020. Nevertheless, personal consumption expenditure increased by 0.4% in November, and the consumption is projected to have balanced out to a 2.8% pace in Q4 after a 3.7% rise in Q3. The US jobs growth pattern has mirrored a sawtooth shape since last January, alternating between better-than-expected and disappointing figures monthly. While November’s nonfarm payrolls marked an increase of 227k over the 36k in October, December’s data has a median forecast of 165k, with an average growth of 180k through November. The unemployment rate was expected to remain steady at 4.2%, with average hourly earnings maintaining a year-over-year rise of 4.0%, outpacing CPI.
# Eurozone
The euro has remained confined within last week’s range of approximately $1.0225 to $1.0460. It ended last week slightly below $1.0310, a trend that continues today. It’s noteworthy that for the third week in a row, the US two-year premium over German bonds has contracted. It peaked in mid-December at just shy of 235 basis points, today lowering to around 203 basis points — the lowest level since November when the Federal Reserve last cut rates. While there isn’t a direct one-to-one correlation between these differential levels and the euro exchange rate, the euro often shows sensitivity to the spread’s direction.
# United Kingdom
Sterling has seen a turbulent week but has currently steadied. Sterling reached a weekly high on Wednesday near $1.2575, dropping to a low yesterday of $1.2240. It has maintained its position above $1.2265 today, fluctuating around $1.23 in European trade. It settled below the lower Bollinger Band yesterday, approximately $1.2295 today. Unlike the US, where higher interest rates have bolstered the dollar, the UK’s rate surge hints at capital flight, potentially squeezing household budgets during mortgage rate adjustments and adversely affecting the economy. This could further worsen the UK’s fiscal position, continue increasing rates, and further weaken sterling, creating a vicious cycle. Yesterday, the UK’s 30-year yield hit nearly 5.5%, its highest since 1998, while the 10-year yield topped 4.92%, the highest since 2008. Yields have retreated slightly from yesterday’s peak, remaining a few basis points above yesterday’s close.
# China
The People’s Bank of China (PBOC) is facing challenges as the dollar pressures the strong side of the 2% band against the yuan. The central bank has set the dollar’s reference rate within a tight range, with today’s firming at CNY7.1891. To alleviate pressure on bond yields, the PBOC announced it would suspend purchases, leading the 10-year yield to increase by a couple of basis points to around 1.64%. Typically, the offshore market adheres to the onshore band; however, recent events have challenged this. The PBOC plans to issue CNH60 billion (~$8.2 billion) six-month bills in Hong Kong next week to absorb excess liquidity and ease offshore yuan pressure, the largest bill offering since the tool’s introduction in 2018. Presently, there are CNH140 billion of outstanding bills. Against the offshore yuan, the dollar remains range-bound between ~CNH7.3050 and CNH7.3700, as established on December 31.
# Japan
Japanese officials have been more successful than their Chinese counterparts in tempering the yen’s decline. The dollar nearly hit JPY158 on December 20, a peak not seen since July, reaching approximately JPY158.55 when the US 10-year yield approached 4.73%, its highest since last April. The currency pair’s trajectory will likely be influenced by the US Treasury’s reaction to the employment report. Initial support may align near JPY157.40 today, but a break below this week’s low (~JPY156.25) might hold more technical significance. Reports suggest the Bank of Japan (BOJ) is contemplating raising inflation forecasts due to yen weakness and rising rice prices, sparking speculation of potential rate hikes. Meanwhile, the swaps market saw minimal changes this week, with a roughly 10 basis point increase expected this month and an 18 basis point rise anticipated in March. Currently, the forecast stands at a 13 basis point increase for January and 20 basis points in March. Deputy Governor Himino’s upcoming speech on January 14 is expected to be a key moment for the BOJ to guide market expectations.
# Canada
The US dollar has been trading in a CAD1.4280-CAD1.4450 range since Monday, maintaining this corridor yet displaying strength for the fourth consecutive session. It’s above CAD1.44 in European trade presently. The looming employment report may challenge this trading range. Canada’s labor market has shown improvement recently, creating an average of 37k jobs over the past three months compared to 27.5k over the preceding eight months. Full-time job growth appears more solid, averaging 64k monthly for the three months through November compared to slightly less than 10k monthly over the prior eight months. Nonetheless, the unemployment rate rose to 6.8% in November, the highest since September 2021. According to the Bank of Canada, it takes longer for new workforce entrants to find employment rather than an upsurge in layoffs. The swaps market is discounting an almost 80% likelihood of a quarter-point cut when the central bank convenes on January 19, following two half-point reductions late last year. Currently, the market has priced in 55-60 basis points of cuts for this year.
# Australia
The Australian dollar nearly revisited its low from September 2022 yesterday, with Bloomberg recording a low of $0.6172 before the Aussie rebounded slightly above $0.6200, having barely crossed $0.6205 today. The lower Bollinger Band is near $0.6145. The forthcoming technical level of attention is around $0.6100. The Reserve Bank of Australia has been reluctant to kick off a rate-cutting cycle due to demand strength concerns. Recently, it reported a 0.4% uptick in household spending following a revised 0.9% gain in October. The average increase over the year’s initial nine months was 0.2%. The futures market has roughly a 75% chance of a quarter-point cut priced in for the next meeting on February 18, with about 75 basis points of easing anticipated for the year.
# Mexico
The Mexican peso faced a third consecutive session of losses against the dollar yesterday, but the currency held slightly below Wednesday’s high (~MXN20.5280). The upward trend extends today, nearing MXN20.5650. Last year’s high was set on December 31 near MXN20.9070, while earlier this week, the dollar fell to about MXN20.2450. The retreat seems corrective, with resistance spanning MXN20.58 to MXN20.65, and breaking past this could direct the market to last year’s high. Mexico’s December Consumer Price Index met expectations, with headline rates declining to 4.21% from 4.55%, the lowest in four years, while core inflation rose to 3.65% from 3.58%. Proposed US tariffs could offset each other; a threatened 25% tariff presents economic headwinds, but a diminished peso might exacerbate price pressures. Considering the high uncertainty, a quarter-point cut in next month’s central meeting on February 6 is more probable than the half-point move suggested by Banxico Deputy Governor Heath. Mexico is expected to report stabilized industrial production for November, following a 1.2% decline in October.
