There were four important macro developments to note in recent days. First, the recent string of US economic data was firmer than expected and GDP looks to have expanded close to 3% in Q4. With the help of guidance by Federal Reserve Waller, who is thought to be a possible successor to Chair Powell, played up the possibility of a cut in H1, and the market implemented the guidance and has next cut nearly priced in for the June FOMC meeting. Second, guidance by Bank of Japan officials makes a rate hike at the end of the coming week likely, barring fresh market turmoil. Third, the mini-meltdown in UK Gilts that saw a nearly 60 bp jump in the 10-year yield since the November subsided and the yield pulled back 20 bp last week, as real sector disappointed and inflation appeared to soften more than expected (which may have had to do with the timing of the survey). Fourthly, surprising no one, China’s Q4 GDP was in line with the official target. After the US imposed new sanctions on China, and the Biden administration also launched a Section 301 investigation into China’s maritime, logistics, and shipbuilding industries, Beijing announced it would launch a probe into alleged dumping of lower-end semiconductor chips that may be “unfairly” subsidized by the incentives and grants in the US Chips Act.  The dollar ended the week on a firm note. Market participants should be braced possibility of a tumultuous week in the capital markets. Trump’s inauguration is on Monday when US markets are closed. The new  administration indicated it is prepared to take immediate actions, and there is little reason to doubt it. In terms of tariffs, some countries have already signaled that they are prepared to retaliate, which will make for its own drama, The preliminary January PMIs will be released at the end of the week. The strength of the Philadelphia Fed survey warns of the upside risk for the US, while the flash reading from the eurozone, will likely show the composite remained in contraction territory for the third consecutive month. The UK is expected to report a rise in wage pressure in November but a weaker composite PMI. The Bank of Japan’s meeting concludes ahead of the weekend and the market has a quarter-point hike nearly fully discounted.  US Drivers:  The dollar is underpinned by the outperformance of the US economy, which takes off pressure on the Federal Reserve to reduce monetary restraint. There is great uncertainty around the precise policies and sequence of the incoming administration. Ahead of the inauguration, but after the December jobs and inflation measures, the wild swings in market expectations appear to be settling around midyear for the next Fed cut. Data/Events: The inauguration and Martin Luther King holiday kick off the week and the economic calendar features the preliminary January PMI, a few regional Fed surveys, and existing home sales. There is talk that Trump 2.0 will hit the ground running with as many as 100 executive orders planned on “day one.” Some “event markets” have better than a 50% chance that some tariffs are announced within the first 48 hours of Trump’s second term. Nothing may rival Washington’s drama, but the final reading of the University of Michigan’s survey will draw attention after the preliminary reading showed a jump in inflation expectations (3.3% vs 2.8%, for one year, and 3.3% vs. 3.0% for the five-10-year outlook). The Federal Reserve enters its self-imposed quiet period ahead of the January 29 FOMC meeting. Prices: The Dollar Index rallied about 10% from the end of September lows through January 13 when the high so far was recorded. The consolidation in the last couple of sessions appears constructive, and the pre-weekend close was the highest settlement in four sessions. Although a great deal of dollar-positive news has been discounted, a significant high does not seem to be in place. The momentum indicators are not generating strong signals, but the Dollar Index has remained above the 20-day moving average (~108.70) for a little more than a month and the five-day moving average remains above the 20-day moving average.  EMUDrivers: Faint growth impulses, weak political backdrop, and expectations that the ECB could reduce its deposit rate by at least 75 bp in H1 25 weigh on the euro. Europe seems ill-prepared to cope with the four-fold challenge of Russia’s aggressiveness, China’s trade challenges, the threat of US tariffs, and internal strife, let alone the internal challenges identified most recently in Draghi’s report. Data/Events: There ae two economic highlights in the coming days. The first is Germany’s ZEW survey on January 21. The assessment of the current situation has deteriorated for the last five months of 2024. The -93.1 reading in December was near the trough seen during the pandemic (-93.5 in May 2020). On the other hand, the expectations component has risen in two of the last three months, and December’s 15.7 was the best since August. The second is the preliminary January PMI at the end of the week. The composite has been in a sawtooth pattern alternating monthly between gains and declines through H2 24. It finished last year at 49.6, rising from 48.2 from November, which was the lowest since January. Prices: The euro stabilized but only after falling to its lowest level since November 2022 at the start of last week, slightly below $1.0180. The subsequent bounces stalled near the 20-day moving average. Although the euro’s six-week decline ended with almost a  0.3% gain, it posted a four-day low settlement ahead of the weekend. The US two-year premium over Germany eased to 200 bp last week, the smallest it has been since November 7 (FOMC cut the target rate by 25 bp, two days after the election) but the euro was able to make little headway, and now the premium looks set to widen.  The euro looks vulnerable.  ChinaDrivers: The yuan has been pressured by the strong US dollar but also by China’s disappointing economic showing, poor performing equity market, and speculation that the PBOC will continue to ease policy. China’s 10-year yield is at a record discount to the US of about 315 bp last week before narrowing to an almost 290 bp. Recall that China offered a premium until Q2 22. The PBOC continues to closely manage the exchange rate, and it has consistently tried to moderate the pace of the yuan’s decline. But that is not the same thing as saying a strong yuan is in China’s interest. Typically, central banks want to see the currency move in the same direction as monetary policy. Data/Events: China will announce the one and five-year loan prime rates early Monday, but the economic calendar is light. Ahead of the Chinese New Year holiday (January 28-February 4), the PBOC may inject extra liquidity into the banking system, but one option, is to leave it whole or in part, after the holiday. Prices:  Since late September, while the Dollar Index rose 10%, the greenback rose less than half as much against the Chinese yuan. Beijing does not want a weak yuan or a strong yuan but a yuan broadly stable against the dollar, so the US does not secure an exchange rate advantage. By setting the reference rate the PBOC limits the extent of the dollar’s depreciation to around CNY7.3325. The platform for China’s Foreign Exchange Trade System rejects trades that imply an exchange rate outside of the 2% band. Chinese officials have also drained offshore yuan liquidity in Hong Kong. Against the offshore yuan, the dollar has held above its 20-day moving average since December 12. It is now near CNH7.3355. The greenback remains in the range set December 31 (~CNH7.3050-CNH7.37).  JapanDrivers: The exchange continues to be sensitive to the direction of US 10-year yield and to speculation about the trajectory of BOJ policy. Barring a major market disruption between now and the end of the week, the BOJ seems more likely than not to deliver a 25 bp hike. In fact, it would arguably be more disruptive if the BOJ did not hike. Data/Events: Japan reports final November industrial production (preliminary -2.3% month-over-month) and the tertiary industry index early Monday. The December trade is due Wednesday, and there is a strong seasonal pattern for sequential improvement (17 of 20 December’s). The national December CPI will be reported Thursday, but the Tokyo report (December 27) sent the signal:  the (temporary) end of household energy subsidies saw the headline and core rates rise, while that excludes fresh food and energy, slipped. The flash PMI is due then as well. The Japanese economy appears to be finding better traction, and the composite PMI rose in November and December. It finished 2024 at 50.4, its best reading in the quarter. It ended 2023 at 50.0. The highlight of the week is the BOJ meeting that concludes on next Friday. The BOJ will also update its economic forecasts and here has been speculation that the rise in rice prices and the weakness of the yen will spur an upward revision in its core CPI forecast, which was 2.5% for the current fiscal year and 1.9% for the next two fiscal years. Prices: The pullback in the US 10-year yield and heightened speculation of a BOJ hike on January 25 saw the dollar correct to about JPY155 at the end of the week from nearly JPY159 seen US jobs data on January 10. That met the (38.2%) retracement of the greenback’s rally from the December 3 low (~JPY148.65). The five-day moving average fell below the 20-day moving average for the first time in a month, illustrating the greenback’s loss of upside momentum. Yet, the greenback recovered to nearly the previous session’ s high (~JPY156.50) ahead of the weekend. There was strong dollar demand broadly during the North American time zone. Only if markets are roiled by comments or actions from the incoming US administration, the BOJ may choose to stand pat, which could trigger a quick drop in the yen. Initial dollar resistance around 156.50 was approached in North America, but that is a lower end of a band that extends to JPY157.40.  UKDrivers:  Concerns about the UK economy add to skepticism of the government’s fiscal credibility that has lingered since the Autumn budget. The sharp rise in the UK 10-year yield since the end of November (~60 bp) has coincided with more than a nickel loss in sterling’s exchange rate against the dollar. Since the peak of the UK’s 10-year yield on January 9 near 4.92%, softer inflation and real sector data saw the yield reach almost 4.60% before the weekend but sterling found little traction. The swaps market has a little more than a 90% chance of a cut discounted for the February 6 Bank of England meeting and almost 65 bp of cuts this year. Data/Events: Tuesday’s employment reports are the upcoming highlight. Several members of the Monetary Policy Committee continue place emphasis on weekly earnings growth as a key to service inflation, which continues to prove sticky. Meanwhile, the unemployment rate has pushed higher. It finished 2023 at 3.9% and was not below 4.1% in the first 10 months of 2023. It peaked at 4.4% in April and May and backed off to 4.1% by August. Still, in September and October it was 4.3%. The preliminary January PMI is at the end of the week. The composite slowed in the last four months of 2024. It was at 504 in December, the lowest since October 2023 (48.7). Prices: Sterling fell to nearly $1.2100 at the start of last week on follow-through selling after the stronger than expected US employment report on January 10. It recovered a slightly above $1.23 in the middle of the week, but the disappointing November GDP and the unexpected decline in December retail sales saw sterling retreat to $1.2160 before the weekend. It settled the week below $1.22 for the first time since October 2023. A break of $1.21 targets $1.20 of psychological importance, but the retracement objective is closer to $1.19. On the upside, the band of resistance found between roughly $1.2280 and $1.2340 may be formidable.  CanadaDrivers: The Canadian dollar’s nearly 6% loss in Q4 made in the top G10 FX performer against the US dollar. It is softer to start the year but is still among the best G10 performers. The rolling 30-day correlation of changes between the exchange rate are the strongest with the US two-year and the spread over Canada’s two-year. The correlation with the US dollar’s broad movement, captured by the Dollar Index is slightly higher (~0.52) over the past 30 sessions. The correlation with changes in oil prices is not statistically significant. There is still a notable correlation (~0.35) between changes in the exchange rate and S&P 500. News that Carney and Freeland will compete for the Liberal Party’s leadership to replace Trudeau did not appear to have much market impact. The Conservative are favored to win the next election, which must be held by the end of October, but it is not clear that a new Liberal leader will survive a vote of confidence. Data/Events:  There are three data highlights in the coming days, ahead of the Bank of Canada meeting on January 29, for which the swaps market has about a 65% chance of a quarter-point cut discounted. That is down from almost 80% before the recent stronger-than-expected December employment report. First, the week begins with the central bank’s business survey. That is followed but the second highlight, the December CPI. The base effect (-0.3% in December 2023) warns of the risk that the headline rate returns to above 2.0%, which has been the peak since July. It was at 1.9% in November. The year-over-year measure of the underling core rates have not fallen for 2-3 months, and this may also encourage a more cautious stance by the central bank, which delivered back-to-back 50 bp cuts in Q4 24. The third highlight is the November retail sales report on Thursday. Canada’s retail sales were particularly strong in the July-October 2024 period, rising at an annualized rate of slightly more than 8%. Prices: The US dollar has been broadly rangebound against the Canadian dollar for the better part of the past month (~CAD1.4280-CAD1.4450) and most of that range was seen on January 6. Amid the greenback’s broad gains ahead of the weekend, it broke higher, and settled a little above CAD1.4475.  It briefly traded above CAD1.4480 for the first time since March 2020.  The CAD1.45 area may be the initial draw but there is little to deter a run at the pandemic high near CAD1.4670. That said, the US dollar settled the week above its upper Bollinger Band (~CAD1.4455), which indicates how quickly it has risen.   AustraliaDrivers: The rolling 30-day correlation of changes in the Australian dollar’s exchange rate and the Canadian dollar is near 0.66. The Aussie is also correlated with changes in the Dollar Index (~0.60). It also appears sensitive to the two-year interest rate differential with the US. The Australian dollar peaked near $0.6900 at the end of September coincided with the Australia and the US two-year yields were near parity. Now, Australia’s at a nearly 30 bp discount and the Australian dollar recently fell to its lowest level since the early days of the pandemic. Data/Events: Australia’s economic calendar is light with the main feature the preliminary January PMI. The manufacturing PMI has been below the 50 boom/bust level since February 2023, with the sole exception being last January. The services PMI has been above 50 since January 2024. It finished last year at 50.8. The composite PMI was at 50.2 throughout Q4 24. It ended 2023 at 46.9. Prices: The Australian dollar succumbed to follow-through selling to start last week after being bludgeoned by the stronger than expected US jobs report on January 10. It recorded a nearly five-year low around $0.6130 before recovering to almost $0.6250 in the middle of the week. However, the fell to a four-day low ahead of the weekend near $.6165. The five-day moving average may move above the 20-day moving average early next week for the first time since early October, but there is also another technical development to note. There is a down trendline connecting the late September high and the early November high that was tested last week. It begins the new week near $0.6230 and finishes the week a little under $0.6200.  MexicoDrivers: Even before Trump’s threat of tariffs on Mexico, there were many critics in Canada and the US that were concerned about Mexico’s imports from China. Trump initially tied his tariff threats to fentanyl and migrant flows into the US. President Sheinbaum pushed against both claims, noting that they have fallen, and more progress is being made. She also playfully responded Trump’s calls to rename the Gulf of Mexico. Her support within Mexico appears to have been bolstered by her stance. Mexico’s modernization was fueled by US multinational companies locating production facilities in Mexico under the terms of the NAFTA (superseded by the USMCA, which was negotiated in Trump’s first time). It is vulnerable to US efforts of re-shoring, as are US companies. Consider that estimates suggest around 2/3 of US imports from Mexico come from affiliates of US companies. Meanwhile, the Mexican economy appears to be slowing and moderating price pressure give the central scope to cut rates again when it meets on February 6. Data/Events:  Mexico report November retail sales on January 22. They fell by 0.3% in October, offsetting in full the small gains record in August and September. Indeed, from May through October, Mexican retail sales were flat. The most important release may be the CPI reading for the first half of January. It is the last inflation report before the Banxico meeting. A continued decline in prices will bolster the confidence of a rate cut but given the weakness of the peso and uncertainties emanating from the US, a quarter-point reduction seems more likely than a half-point move. Prices: The US dollar reached near MXN20.94 before the weekend, its highest level since July 2022. It pulled back to a little below MXN20.70 in North American turnover before new bids emerged and lift it back to MXN20.80. The greenback’s advance was extended for the fourth consecutive week, matching the longest advance in almost five years. In the bigger picture, the dollar has met the (50%) retracement of the losses since the pandemic peak in April 2020 near MXN25.7850. That retracement level (61.8%) is near MXN21.0250. More By This Author:Chinese Economy Grew 5% In 2024 (If You Believe It), UK Retail Sales Disappoint, And “Day One” Looms
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