It seems markets have finally remembered that good news is good news and bad news is bad news, as the United States Dollar regains the front foot this morning.
The S&P 500 hit an all-time record yesterday and eyes an unprecedented benchmark of 5,000 today, along with many other equity indices around the world opening in the green this morning. Though often this would correlate with a depreciation of the Buck, high interest rates and growing optimism about the larger health of the US economy are keeping the USD afloat. US economic growth is currently sitting above 3% and unemployment is below 4% – a goldilocks picture in the grand scheme of things, and both USD and US equities are finding the market to be just right. Whether the fairy tale continues, however, is still up for debate as storms brew with growing consumer debt and mild panic on regional banks and commercial real estate.
The notable exception to this rather buoyant global mood, as has become commonplace this year, comes from China as its equities rout continues. China’s deflation problem also proved to be continuing yesterday as consumer prices fell at the fastest pace in nearly 15 years, sliding 0.8% annually in January. Hong Kong’s Hang Seng index, after managing to eke out a slight rebound from 5-year lows earlier this week, fell back into losses and has slid more than a percent in Asian and European trading. Markets in China will be closed for the remainder of this week and all of next for the Lunar New Year holiday, so trading in Asian FX markets will be quite thin as China scrambles to revive domestic demand and find a way to boost consumer confidence.
The data calendar for the remainder of this week is fairly calm, keeping market movements on the smaller side, but Banxico does meet today with a rate decision to come this afternoon. Domestically, Fed speakers have dominated the narrative this week as they continue to push back on the timing of potential rate cuts. We still do not expect that the Fed will cut interest rates before June of this year, and our view has been validated thus far by voting members of the central bank. US CPI next week will be an important benchmark to confirm that inflation is not, in fact, reaccelerating.
What to Watch Today…
Mexican Peso is slipping against USD this morning ahead of Banxico’s interest rate decision at 2PM this afternoon. Though the central bank in Mexico is unlikely to change its target interest rate of 11.25%, consumer prices have reaccelerated slightly in the last couple of months and will undoubtedly put a bit of pressure on officials. Banxico’s target inflation rate is 3%, higher than most other central banks, but its CPI rose 4.88% in January. Core inflation did continue to slow, but it’s possible that this reading could tick up in the coming months as well.
Japanese Yen came just shy of a two-month weak point against all G10 currencies this morning after the Bank of Japan’s Deputy Governor Shinichi Uchida offered pretty substantial pushback on continued speculation that the BoJ could end its negative interest rate policy. Uchida said that even if the central bank does decide to change its policy, any interest rate increases will not be rapid or continuous. Since the start of 2024, JPY has slid more than 5% against USD. We will be watching for further verbal warnings from currency officials as we approach the threshold that has prompted such rhetoric before.