FX Update: Low beta blues, sterling churning

US data yesterday was mostly positive, though the US dollar was rather sluggish in responding to developments. Note that the core US Retail Sales number for December was a bit less impressive than it appeared, given negative revisions to the prior two months’ data. Elsewhere, the NAHB survey suggests US housing market activity continues to hum along at robust levels, and the weekly jobless claims plunged back to 204k, one of the lowest readings ever on a seasonally adjusted basis. Today we get a look at the US Industrial Production number for December after the prior three months were below 2018 levels (although, as we ask in this morning’s Market Call, does the still expanding services sector so dominate the US economy that we can’t read this cycle like past cycles?)

US Treasury Secretary Mnuchin expressed interest yesterday in selling 20-year US treasuries for the first time to fund growing deficits, which seemed to take long yields higher yesterday after a rather muted reaction to mostly positive US data. More information supposedly to follow on February 5^th, but long US yields deserve plenty of attention if they work out of the late range and are a key coincident indicator for USDJPY, which will find life above 110.00 increasingly comfortable if yields pull higher still. (although at some point, higher longer yields would sorely test the current melt-up in risk – as we saw in 2018 – the danger zone for risky assets begins to pull into view, we would argue, if the US 10-year moves above 2.00% and/or the 30-year above 2.5%)

Chinese numbers overnight look robust, especially the +6.9% YoY in Industrial Production for December, though we are about to enter the two months of highly seasonal data around the Chinese New Year celebrations (this year, the New Year on Jan 25).

The Turkish central bank “only” cut rates another 75 basis points yesterday to a 11.25%, perhaps respecting that the last year-on-year CPI readings are running at north of 11.8%, thus taking the real rate negative. Somehow, TRY managed to rally on the day – but the move not holding well, and given the real rate picture, other EM’s look far more attractive.

Chart: EURGBP - which way?
EURGBP looked heavy this morning after giving the false impression at the beginning of this week that the needle pointed immediately higher. Given very weak UK data and prospects for a Bank of England rate cut at the January 30 meeting, this was impressive and suggested that capital is returning to the UK despite the uncertainties. We would be constructive on further downside in the near term if the pair can erase the rally after a very ugly December UK Retail Sales number this morning and close back below 0.8500. Until then, EURGBP another pair showing the difficulties in finding a directional move in this market that last more than a couple of days.