The Dollar Consolidates while Japan Steps Up its Intervention Threats and Decision Day for the SCOTUS

[Ben Graham]

The dollar is mostly softer, but the consolidative tone persists. The yen remains the notable exception. Japanese officials have taken several steps up the intervention ladder with heightened warnings. The market initially extended the greenback’s gains to JPY159.45 before taking some profits and pushing the dollar to around JPY158.60. The market senses it is on thin ice, but many look for an intervention-inspired drop to buy the dollar cheaper. Bond markets seem well behaved in the face of a five-day, 11% rally in oil prices. The US 10-year yield frayed the 4.20% cap in recent days but is near a four-day low now below 4.15%. The weak yen and higher JGB yields seem to go hand-in-hand, but it has not deterred Japanese equities from setting record highs. 

The North American session features US PPI and retail sales, and no fewer than five Fed officials. Also, today is a decision day for the Supreme Court. It does not pre-announce which cases have been decided, but it is possible that the ruling on the challenge to President Trump’s tariffs under emergency powers is handed down.  A rejection, which is widely anticipated, is thought to be initially negative for bond and the dollar but positive for equities. 

Prices 

G10

• The euro’s inside day on Tuesday neutralizes the knee-jerk gain on the back of the latest challenge to the Federal Reserve’s independence. It is coiling inside yesterday’s range today and has been stuck between about $1.1635 and $1.1660. The session high was recorded in late European morning turnover. It looks to have stalled, giving a downside bias in early North American trading. Last Friday’s low, slightly below $1,1620, needs to take out to extend to slide that began on Christmas eve. The 200-day moving average is near $1.1580, and the euro has not traded below it since early March 2025.

• The dollar reached almost JPY159.20 near midday in NY yesterday and to JPY159.45 today. Japanese officials have climbed further the low rungs of the intervention escalation ladder, with new verbal warnings from the top Ministry of Finance officials, but it is hard to argue the market is disorderly or volatile. The actual (historic) one-week volatility is about 6.9% while the one-month implied vol is about 8.2%, which is below the December high (~9.5%). Indeed, it is barely above the 50-day moving average (~8.5%). Last year’s low was near 7.2%.  The greenback has been sold to around JPY158.60 in the European morning. Nearby support is seen closer to JPY158.20. 

• Sterling was turned back yesterday in front of $1.35 and was sold to about $1.3425. It remained pinned near the lows through the North American afternoon. It has found support near $1.3420 today and has recovered back to $1.3460. The immediate risk is for some slippage to back to around $1.3435. 

• The greenback recovered from a three-day low around CAD1.3855 to approach CAD1.39 in a quiet and uneventful session yesterday. Tit is consolidating between CAD1.3880 and CAD1.3900 in quiet turnover today. The US dollar has come a long way since the day after Christmas low (~CAD1.3645), but we suspect there is still scope for CAD1.3950-CAD1.4000.

• After rising to a four-day high slightly above $0.6725, the Australian dollar reversed lower and traded below Monday’s low (~$0.6675). It managed to settle slightly above it. The market seems to lack near-term conviction, and the Aussie is trading between about $0.6680 and slightly above $0.6700. It has approached session lows in the European morning, and our bias is on the upside in early North American activity. 

EM

• While the dollar was mostly firmer yesterday, it was sold to a new low since July 2024 yesterday slightly below MXN17.8150. It slipped below MXN17.81 today. Options $820 mln expire tomorrow at MXN17.80. There seems little on the charts ahead of MXN17.60. 

• Taking its cues from the dollar’s consolidation rather than Chinese trade figures, the greenback reached a three-day high against the offshore yuan today, slightly below CNH7.9785. The multiyear low was set on Monday near CNH6.9630. The PBOC set the dollar’s reference rate higher (CNY7.0120 vs. CNY7.0103 yesterday) for the first time in four sessions.

• The dollar was initially knocked down to INR89.98, a three-day low on sales by the Reserve Bank of India, but the buying interest proved too much and the greenback recovered. It returned to yesterday’s high (~INR90.3015), the high since mid-December. 

Other Markets

• Equities:  The large bourse in Asia Pacific advanced, with the Nikkei’s nearly 1.5% rally leading the charge. China’s CSI 300 stumbled as has India’s main indices. Europe’s Stoxx 600 is nursing a small gain, and US index futures are off 0.35%-0.65%

• Rates: The weak yen and prospects of a snap election keep the JGBs under pressure. The 10-year edged higher, and at 2.17% is up 11 basis points since the end of last year. European benchmark yields are mostly a little lower, with the 10-year Gilt yield off nearly two basis points to extend this year’s decline almost 10 bp. The 10-year US Treasury yield is nearly three basis points lower to almost 4.15%, off 1.5 bp this year. 

• Gold and silver at record highs. Gold reached about $4640 and silver traded above $91.50. 

• March WTI’s surge continues. It traded below $56 last week and approached $62 today, its highest level since late September.  

Data

• The US reports October and November PPI today but the market remains highly convinced that the Federal Reserve is on hold, and even more so after the Justice Department action that has brought widespread condemnation. It is difficult to envisage any court taking the charges seriously. November retail sales by get a closer look. The median forecast in Bloomberg’s survey is for a 0.4% increase (same as October), though core retail sales may have slowed to 0.4% (from a heady 0.8% increase in October. The Q3 current account will also be reported. Economists seem to pay more attention to it than the market. The deficit is expected to narrow to about $239 bln, which would be the smallest since Q3 23. Portfolio inflows have easily financed it, with the TIC data showing foreign investors bought a net of more than $360 bln of US stocks and bonds in Q3. December existing home sales are also due. They likely rose for the fourth consecutive month but are still subdued. Five Fed officials speak today, including the uber-dove, Governor Miran. Lastly, it is another “decision day” for the Supreme Court. There is no pre-announcement of which cases have been decided, but it is possible that the president’s use of emergency powers to levy tariffs will be decided. 

• The Polish central bank is expected to stand pat after cutting its reference rate by a quarter of a point in the last four meetings. It stands at 4.00%. The swap market is discounting 50 bp of cuts by mid-year. CPI was at 2.4% year-over-year in the initial estimate for December.

• China reported December trade figures. The surplus rose to $114.15 bln, which puts it at a whopping $1.19 trillion for the year. The 2024 surplus was about $992 bln. Exports rose 6.6% year-over-year in December, which is more than twice the increase the median forecast in Bloomberg’s survey anticipated. Imports were up 5.7%, compared with the 0.9% median forecast in Bloomberg’s survey. Despite a 20% drop in exports to the US, shipments rose 8.4% to Europe and 13.4% to southeast Asia. Exports rose by over 25% to Africa. Note that some Chinese data suggests that around 28% of its exports are from “foreign-invested enterprises”, often a joint venture between a foreign firm and a Chinese company. About 20% of its auto exports are accounted for by foreign brands. 

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