Capital Markets: "Consolidative Tone in FX"

From Marc to Market:

Overview: After sharp losses yesterday, the US dollar has stabilized today arguably ahead of Fed Chair Powell's speech at the Riksbank symposium. Yesterday's Fed speakers stuck to the hawkish rhetoric, and this seemed to help reverse the equity market gains, though the greenback remained soft. If Powell does not push back against the easing of financial conditions, it could very well fan risk-taking appetites and lead to a further easing of financial conditions.

Asia Pacific equities were mixed, while Europe's Stoxx is snapping a two-day advance. US equities are little changed. Benchmark yields are mostly higher, and the US 10-year yield may be basing around 3.50%. New Chinese quota for oil imports and the weaker dollar seemed to help crude oil prices. The market continues to look past the current Covid crisis in China and anticipates recovery and new stimulus measures. Iron ore prices jumped 2.4%. Several of the currency pairs we review near the Bollinger Bands, which are set two-standard deviations for the 20-day moving average.

Asia Pacific

As expected, Tokyo December CPI rose to new cyclical highs. The headline rate firmed to 4.0% from 3.7%. The core measure, which excludes fresh food rose a little more than expected to 4.0% from 3.6%. The measure than excludes fresh food and energy rose 0.3% to 2.7% as anticipated. Fiscal measures and the recovery of the yen should help cap price pressures shortly. The subsidies for energy starting this month are expected to lower core CPI by as much as 0.8% here in Q1. A measure of the trade-weighted yen has risen by about 10% since bottoming on October 21. The price of Brent crude oil has fallen by a little more than 15% over the past period. Wheat prices are off nearly as much. The BOJ meets next week and there is some speculation that it will lift its inflation forecast, which stand at 2.9% this fiscal year and falling to 1.6% in the next two. The median forecasts in Bloomberg's survey sees 2.4%, 1.8% and 1.2% respectively. Separately Japan reported that household spending collapsed in November, falling 1.2% year-over-year. The median forecast in Bloomberg's survey called for a 0.5% increase. It is the weakest since April, when the economy was contracted in Q2 22. On a month-over-month basis, this is a 0.9% slump after rising 1.1% in October....

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