24/01/2025 Market Watch

Market Watch: Dollar Weakens as Global Markets Rally

The US dollar has lost ground across the board, falling against all G10 currencies and most emerging market currencies. Earlier gains fueled by tariff-related concerns have reversed, with the greenback weighed down by a surprise rate hike from the Bank of Japan (BOJ) and stronger economic data in Europe. Market participants are also preparing for next week’s policy divergence, as the European Central Bank (ECB) and Bank of Canada are expected to lower interest rates, while the Federal Reserve maintains its stance. However, much of this narrative appears to have already been priced into the market in recent weeks.

In equities, Japanese stocks were largely unchanged, but other major markets in Asia posted gains. China’s efforts to bolster corporate and financial sector support for its equity market have yielded results, with mainland stocks trading in Hong Kong rising 2% today. European equities are also performing well, with the Stoxx 600 advancing for an eighth consecutive session to reach new record highs. Meanwhile, US equity futures are trending lower.

In bond markets, European benchmark 10-year yields are marginally higher by 1-2 basis points, while the 10-year US Treasury yield softened slightly to 4.63%, remaining nearly flat for the week.

Commodities are seeing mixed performance. Gold is trading higher at $2,775 per ounce, nearing last year’s record high of $2,790. Crude oil prices are recovering after a brief dip, with March WTI hovering around $75 per barrel as North American trading begins.

United States of America

The Dollar Index, which peaked at 110.25 on January 13, has faced significant downward pressure. After testing the month’s low near 107.75 on Wednesday, it briefly rebounded to 108.50 but fell again following comments from President Trump at Davos. His remarks neither broke new ground nor emphasized tariff threats, leading to renewed selling pressure. The index found temporary support below 108.00 before breaking below 107.75 today. This level could signify the neckline of a potential head-and-shoulders topping pattern, with a projected decline toward 105.25. Notably, this level aligns closely with the 50% retracement of the index’s gains since late September.

Economic data continues to shape market sentiment. The preliminary PMI data released today highlights mixed conditions. While the manufacturing PMI has remained below the 50 boom-or-bust threshold since mid-2024, the services PMI is at a cyclical high, and the composite PMI reached its strongest level since April 2022. Housing market data also signals resilience, with December’s existing home sales expected to rise for the third consecutive month. The projected annualized rate of 4.2 million units would mark the best performance since March. Meanwhile, the final January reading from the University of Michigan’s consumer survey may attract attention, particularly after the initial estimate revealed stronger inflation expectations.

Key Points:

• Dollar Index fell below 107.75, potentially signaling a head-and-shoulders topping pattern with a target near 105.25.
• Manufacturing PMI remains below 50, but the composite PMI hit its highest level since April 2022.
• December existing home sales are expected to rise for the third month, reaching the best annualized pace since March.
• University of Michigan’s consumer survey may confirm firmer inflation expectations.

Australia

The Australian dollar broke through the $0.6300 resistance level during the North American session, a barrier that had capped recovery attempts earlier in the week. Today, the currency climbed further, reaching $0.6330, with the next target near $0.6375. After declining for six consecutive weeks from late November to mid-January, the Australian dollar has now posted two consecutive weeks of gains. This week’s increase of over 2% marks the currency’s largest weekly appreciation since November 2023.

Despite this momentum, economic indicators paint a mixed picture. Australia’s manufacturing PMI remains below the critical 50 threshold, signaling contraction, while the services sector continues to grow at a subdued pace. The preliminary January composite PMI inched up slightly to 50.3 from 50.2, where it had stagnated for the past three months.

Key Points:

• Australian dollar broke above $0.6300, reaching $0.6330, with a target near $0.6375.
• Two consecutive weeks of gains, including a 2% appreciation this week—the largest since November 2023.
• Manufacturing PMI remains below 50, while services sector growth is slow.
• January composite PMI edged up to 50.3 from 50.2, indicating modest improvement.

Canada

The US dollar, after reaching CAD1.4415 yesterday, has faced sustained selling pressure. It dropped to around CAD1.4345 and extended losses today to approximately CAD1.4315. Earlier in the week, the month’s low was set near CAD1.4260, and a break below this level could trigger a swift decline toward CAD1.42.

November’s Canadian retail sales data, while disappointing, had little immediate impact on the currency. Headline sales were flat, falling short of the anticipated 0.2% growth. Excluding auto sales, retail activity contracted by 0.7%, marking the second consecutive monthly decline. Despite these weak figures, the Canadian dollar remains resilient.

The US two-year yield premium over Canada has held steady this week, just below 137 basis points, the widest since 1997. Meanwhile, market confidence in a 25-basis-point rate cut by the Bank of Canada next week has grown significantly. The swap market now fully prices in this outcome, compared to an 80% probability at the end of last week.

Key Points:

• US dollar fell from CAD1.4415 to CAD1.4315, with support near CAD1.4260; a break could push it to CAD1.42.
• November retail sales in Canada were flat, missing expectations, with a 0.7% decline excluding auto sales.
• US two-year yield premium over Canada remains near 137 basis points, the highest since 1997.
• Markets are fully pricing in a 25-basis-point rate cut by the Bank of Canada next week.

China

Contrary to expectations, Beijing has not moved to weaken the yuan in response to US threats of a 10% tariff increase, ostensibly linked to fentanyl shipments to Mexico. Instead, the People’s Bank of China (PBOC) lowered the dollar’s reference rate on Tuesday by 0.25%, marking its most significant adjustment since November 8, shortly after the US election and a Federal Reserve rate cut. Last Friday, the reference rate stood at CNY7.1889 but was reduced to CNY7.1705 today.

While the PBOC kept the one-year Medium-Term Lending Facility rate steady at 2%, it reduced the amount available through the facility. However, to address liquidity needs ahead of the Lunar New Year holiday, the central bank injected short-term funds.

The dollar has dropped to CNY7.2375, its weakest level since December 10. Against the offshore yuan, it declined further to CNH7.2345, retracing nearly half of its post-election gains. The 200-day moving average, around CNH7.2175, aligns closely with the 38.2% retracement of the dollar's larger rally since last September.

Key Points:

• PBOC lowered the dollar’s reference rate to CNY7.1705, the largest cut since November 8.
• Liquidity injections were made ahead of the Lunar New Year, while the one-year lending rate remained unchanged.
• The dollar fell to CNY7.2375 (lowest since December 10) and CNH7.2345 offshore (retracing nearly half of post-election gains).
• 200-day moving average near CNH7.2175 is a key technical level to watch.

Europe

The euro established a base near $1.0260 last week and began recovering earlier this week, facing initial resistance around $1.0460. A stronger-than-expected preliminary January PMI pushed the euro above this level, reaching $1.0515—the highest since December 17. This move surpassed the 38.2% retracement of its losses since the US election, with the next retracement level (50%) near $1.0560.

The euro's resilience comes despite strong market expectations that the European Central Bank (ECB) will ease policy further in next week’s meeting. Markets are confident the ECB will cut rates and provide forward guidance, though likely without firm commitments. However, much of this has already been priced in by traders. Meanwhile, the US two-year yield premium over Germany has narrowed for five consecutive weeks, adding support to the euro.

On the data front, the eurozone’s flash January composite PMI posted consecutive gains for the first time since May 2024, climbing back to the 50 boom/bust threshold for the first time since October. Germany’s composite PMI rose above 50 for the first time since last June, signaling expansion, while France’s composite edged higher but remains contractionary at 48.3. The manufacturing sector remains the primary drag across the region.

Key Points:

• Euro broke above $1.0460 resistance, reaching $1.0515, its highest since December 17.
• Surpassed 38.2% retracement of post-election losses; next target at $1.0560.
• Market anticipates further ECB easing next week, with rate cuts and forward guidance priced in.
• US-Germany two-year yield premium has narrowed for five consecutive weeks.
• Eurozone January composite PMI rose back to 50, driven by Germany, while France remains in contraction.

Japan

The Bank of Japan (BOJ) increased its overnight target rate by 25 basis points to 0.50%, a move initially perceived as hawkish. While the BOJ lowered its GDP forecast for the current fiscal year, it raised its inflation outlook. Core CPI for the year was revised upward to 2.7% (from 2.5%), while next year’s forecast increased to 2.4% (from 1.9%). Excluding energy, inflation projections were also adjusted higher for both years. The swaps market has already priced in an additional rate hike for Q4 2025.

In other data, Japan’s preliminary January composite PMI rose for the third consecutive month to 51.5, its highest since September. Meanwhile, national CPI broadly aligned with Tokyo’s earlier figures. The headline rate climbed to 3.6% (from 2.9%), and the core rate (excluding fresh food) increased to 3.0% (from 2.7%). These increases reflected the expiration of energy subsidies for households, though they have since been renewed. CPI excluding both fresh food and energy remained stable at 2.4%.

On the currency front, the dollar bottomed against the yen earlier this week at JPY154.80 and rebounded to JPY155.90 during the European session. Resistance lies in the JPY156.00-20 range.

Key Points:

• BOJ raised the overnight rate to 0.50%, with hawkish inflation projections: core CPI now seen at 2.7% (2024) and 2.4% (2025).
• January composite PMI climbed to 51.5, the highest since September.
• National CPI rose to 3.6%, driven by the temporary end of household energy subsidies.
• Dollar rebounded against the yen, with resistance near JPY156.00-20.

United Kingdom

Sterling has rebounded from its recent sell-off, which saw it drop to $1.21 on January 13. The currency benefited from a weaker dollar and better-than-expected PMI data, climbing to nearly $1.2450 today after stalling near $1.2400 earlier. A key technical indicator—the five-day moving average—is set to cross above the 20-day moving average for the first time in a month, signaling potential further gains. The next resistance level is around $1.2460, marking the 38.2% retracement of its decline since the US election.

The preliminary January PMI data provided additional support. The manufacturing PMI rose to 48.7 from 47.0, while the services PMI edged up slightly to 51.2 from 51.1. This lifted the composite PMI to 50.9 from 50.4, snapping a four-month decline and indicating marginal growth.

Key Points:

• Sterling rose to nearly $1.2450, with resistance at $1.2460.
• The five-day moving average is poised to cross above the 20-day moving average, indicating potential bullish momentum.
• Manufacturing PMI improved to 48.7, while services PMI increased to 51.2.
• Composite PMI rose to 50.9, breaking a four-month streak of declines.