HomeContributorsFundamental AnalysisWe’d Be Cautious to Bet on a Dollar Reversal Now

We’d Be Cautious to Bet on a Dollar Reversal Now


US December CPI was bang in line, coming in at 6.5% y/y (-0.1% m/m) in terms of headline and 5.7% (0.3% m/m) in the core gauge. Markets cheered as inflation momentum continued to slow even though the underlying, sticky price trend remains strong (services inflation at 0.6% m/m to 7.5% y/y, housing costs inflated by 0.7% m/m to 8.1% y/y). US yields dropped between 7.3 bps and 12.1 bps with the belly of the curve outperforming. A stellar $18bn 30y auction added to the leg lower. Critical technical levels in the 2y and 10y around 4.13% and 3.42% were tested but survived. We continue believe that markets are too optimistic about inflation returning to the 2% goal quickly, a view shared by the likes of Fed’s Bullard and Barkin who spoke after the CPI release. Either way, the numbers cemented the downshift by the Fed from a 50 bps tightening pace to 25 bps from early February on. Voting Fed member Harker joined Collins in arguing for such a move and we wouldn’t be surprised to see other calling for that in coming days too. European yields were sucked lower in the slipstream but in the end managed a close well off intraday lows. German bund yields lost 2.9-4.5 bps across the curve. The FX market was all about dollar weakness. DXY fell below the 2020 pandemic surge support (103) to close at 102.24, just below the 62% retracement of the 2022 rally. EUR/USD pushed through 1.0787 resistance for a close around 1.085. JPY-driven strength during the Asian session was accompanied by USD-weakness and brought USD/JPY to 129.25, the first close sub 130 since June. The EU and UK plan to take negotiations about the Northern Irish protocol to the final inning next week. Sterling was unable to profit though, with EUR/USD’s ascent filtering through in EUR/GBP as well. The pair surpassed recent highs/0.8867 resistance and is from a technical perspective headed to 0.90.

Japan’s 10y yield this morning breached through the BoJ’s 0.50% upper yield cap, forcing the central bank into more unscheduled bond buying. It is still the fall-out of a Japanese newspaper reporting yesterday that the central bank will consider more policy tweaks at the meeting next week. This is also what caused the yen surge yesterday and to a lesser extent today. USD/JPY extends its drop to 128.85 even as the dollar in general is slightly better bid after Thursday’s sell-off. EUR/USD stabilizes near yesterday’s close. From a daily perspective and going into the weekend, we’d be cautious to bet on a dollar reversal now, even if yesterday’s reaction looks like an exhaustion move (ever seen the market shift this much on figures that literally couldn’t be more spot on?!). The technical picture doesn’t help either. The next EUR/USD resistance is located at 1.0942. Same goes for US/core bond yields. We’re happy to see 2y and 10y support zones having survived but new tests are likely. Today’s eco calendar contains U. of Michigan consumer confidence and the unofficial (financial) kick-off of the earnings season. UK figures were due this morning. November industrial production disappointed but compared with slightly better figures for the services sector. In a first reaction, sterling doesn’t pick sides. EUR/GBP is trading just below 0.89.

News Headlines

The Bank of Korea raised its policy rate by another 25 bps rate hike to 3.50% this morning. Today’s rate hike brought the total amount of rate increases  this cycle to a cumulative 300 bps. The move was largely expected. The BOK shifted to a more neutral guidance on the need for potential further rate increases. ’The board will judge whether the base rate needs to rise further while thoroughly assessing the economic downside risks and financial stability risks, the effect of base Rate raises, the pace of the inflation slowdown and monetary policy changes in major countries.’ Even so, the voting pattern showed that a further rate hike at next meeting isn’t evident. Korea CPI inflation printed at 5.0% Y/Y in December and governor Rhee expects to be around that level until February. The Korean won weakened mostly this morning after a recent rebound to currently trade near USD/KRW 1243.5.

According the China trade data published this morning, exports in dollar terms fell 9.9% compared to the same month last year. Imports dropped 7.5% Y/Y, resulting in a monthly trade surplus of $ 78 bln. Declines both of imports and exports were higher than the previous month, but still less deep than expected. For the whole of 2022 China both printed a record $3.6 trillion exports (+7%) and record trade surplus of $878 bln. A global slowdown and the focus of domestic policy to revive domestic growth might reduce the trade surplus further out in 2023. The yuan (USD/CNY 6.73) this morning, after a recent USD-driven rally, is holding little changed near recent peak levels.

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