Currencies Consolidate After Chop Fest

The US dollar rallied in the North American afternoon yesterday and the
timing coincided with the release of the Fed’s Beige Book that saw several
districts report wage and price pressures.
  The US 10-year yield moved
toward toward 2.60%,, and helped by speculation that as US companies repatriate
earnings kept abroad that they may have to liquidate the investments, some of
which are thought to be in Treasuries.   

The greenback is trading with a modest downside bias today after
yesterday’s late bounce was extended. 
The euro fell to $1.2165 in
early Asia, the lows for the week, but the dip was bought and by in the
European morning, the euro was back testing $1.2220.  There are roughly
1.3 bln euro in options struck at $1.2200-$1.2220 that expire

The dollar is faring somewhat better against the yen.  It pushed
above JPY111.00 yesterday and has held above it today, reaching almost
JPY111.50 in Asia before consolidating in the European morning.  Thee is a
$1.5 bln option struck at JPY111.00 that will be cut today.  There is
another option of the same size struck at JPY110.80 that expires today as

Sterling spiked a little through $1.3940 yesterday, a post-referendum high,
but closed the North American session nearly a cent lower from the peak.
It is consolidating so far today in narrow ranges in nearly a quarter cent
range on either side of $1.3825.  

The  news stream is light in Europe after Australia and China provided
the highlights earlier.  Australia reported the December jobs data. 

Employment rose 34.7k, which is in line with the year’s average through
November (~33.5k).  Full-time employment rose 15.1k, which comes on the
back of 75k increase over the past two months.  The participation rate
rose to 65.7% from 65.5%, while the unemployment rate ticked up to 5.5% from
5.4%.  It is understood as a favorable report, but probably not enough to
bring forward an RBA rate hike.  The Australian dollar popped above $0.8000
for the first time in four months yesterday and is consolidating in a have cent
range below it today.  

China reported Q4 GDP rose 6.8% year-over-year in Q4 the same as in Q3,
though the quarterly pace slowed to 1.6% from 1.8%. 
The incredible
stability of China’s GDP is off-putting and breeds doubts even if it is broadly
consistent with other data.  The world’s second largest economy grow 6.8%
in the fourth quarter of not only last year but the previous two years as
well.  Last year, the quarterly average pace of 1.67% matched the 2016
average and compares with 1.68% in 2015.    China reported other
data as well.  Retail sales slowed into the year end, with December sales
rising 9.4% year-over-year, down from 10.2% and the weakest since 2006. 
Industrial output was a bit firmer than expected at 6.2% year-over-year and
fixed increased rose 7.2%, the same year-over-year pace as in

China is also the subject of two other talking points today. 
First, the US Treasury data shows that China’s holdings of Treasuries slipped
1.1% in November to stand at a four-month low of $1.18 trillion.  Recall
the recent Bloomberg report that people were advising the PBOC to take a more
cautious approach to US bonds.   Recall that the dollar value of
China’s reserves rose by $10 bln in November.  However, as we noted at the
time, the November increase could be explained by the valuation rather than the
accumulation of more reserves.  The euro rose 2.2% against the dollar in
November.  Making conservative assumptions about the amount of euros,
China holds can easily explain a $10 bln increase. 

The other talking point is President Trump’s interview in which he warned
of coming action against China for violation of intellectual property rights.
He suggested a big fine would be set shortly, though other observers suspect
several measures, which could include tariffs, and actions in areas that the
WTO does not cover.  It looks like some announcement may be forthcoming
shortly, and it will also appear prominently in the State of the Union address
at the end of the month.  

Separately, but not totally unrelated, the US auctions $13 bln of
inflation-protected 10-year notes today.
  With market-based measures
of inflation on the rise, the anecdotal Beige Book, and data suggesting that
the tax cuts come as the US economy appears to be accelerating, makes demand
for the TIPS a window into market psychology.  

The rally in US equities yesterday failed to carry over into Asia, and
the MSCI Asia Pacific Index shed 0.4%. 
It is the first back-to-back
drop since early December.  However, Japan was the main drag (Nikkei off
0.45% and the Topix off 0.75%).  Excluding Japan, the MSCI Asia Pacific
Index rose 0.15% and extended its winning streak to a fifth session. 
European shares slightly firmer and the Down Jones Stoxx 600 is up fractionally
on balance as information technology, energy, materials and financials have
offset the losses in telecom, utilities, real estate and consumer

Bond markets are heavy.  Australia and New Zealand 10-year
yields rose two and four basis points respectively, while yields are up
one-three basis points in Europe and the US 10-year Treasury yield is trying to
get a foothold above 2.60%.    

The US reports housing starts and permits, weekly initial jobless claims
(which cover the week that the January non-farm payroll survey is conducted)
and the Philly Fed survey (January). 
Yesterday’s report showing a
surge in industrial production (0.9% and 8.2% annualized pace in Q4) was fueled
by utilities (5.6%) and mining/drilling (1.6%).  Manufacturing edged up by
0.1%.  It is unreasonable to expect the overall pace of industrial output
to be sustained at its best level since Q2 2010.  If the pace slows by half
that would still be consistent with above trend growth in Q1 18.  

The Bank of Canada seemed to have tried to deliver a dovish hike
yesterday, but the market views have not changed.
  The two-year yield
eased a single basis point and the OIS curve was unchanged.  The market
favors another hike in April/May.   The Bank of Canada expressed concerns
about risks associated with a breakdown of NAFTA.  The second to last
round of negotiations are to be held in Montreal next week.  Yesterday,
reports quoted Trump threatening to abandon NAFTA, and even if this
materializes, it most likely would not be until the negotiations are completed.


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