by Marc Chandler
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The US dollar advanced against all the G10 currencies last week but the Swiss franc but turned in a most mixed performance against emerging market currencies. The US 10-year yield fell for the third consecutive week and near 4.16%, it is around a dozen basis points below where it settled the night before the US election. The two-year yield fell for the second consecutive week and settled near 4.10% is about half a dozen basis points below the pre-election day level. The Dollar Index, on the other hand, is up 2%. Among the G10 currencies, the yen is the only currency that has appreciated against the dollar since the election. On the other hand, the Chinese yuan's co-movement with the yen has broken down and the yuan has lost about 2.35% since the election. Bitcoin moving above $100k, seemingly in response to personnel in the next Trump administration caught even mainstream media attention. Perhaps Fed Chair Powell had it right last week in a Q&A session at the NY Times that bitcoin is more a rival to gold than the dollar.
The week ahead features four G10 central bank meeting, and Brazil's central bank. The Reserve Bank of Australia is on hold. There is negligible risk of a surprise. Brazil's central bank will likely hike by 75 bp to bring the Selic rate to 12%. The Bank of Canada meets, and the jump in unemployment (6.8% vs 6.5%) may have been a sufficient inducement for the central bank to look past the firmer CPI and deliver the second consecutive 50 bp cut. The ECB and SNB meet on Thursday. The market toyed with the idea of a 50 bp cut by the ECB but has backed off to favor a quarter-point move. The market is nearly divided over the outlook for the SNB. The odds in a swap market are slightly shy of 50% for a half point cut, down from around 66% at the start of the week. The US reports November CPI on Wednesday, and the headline rate is expected to rise for the second consecutive month. The derivatives market is discounting about an 85% chance of a Fed cut. The challenge is that the Fed officials enter their quiet period ahead of the December 17-18 meeting. Recall that in September, fresh guidance was deemed necessary after the soft CPI but during a quiet period, and it appears that a story was planted in the press to prepare the market for a 50 bp cut.
United States: On the heels of the firm jobs data, the US is likely to report the second consecutive increase in the year-over-year headline CPI. It gives substance to the Fed's recognition of a bumpy path toward the 2% target, but also tests official confidence. In September, the median forecast was for two cuts in Q4. They have delivered one. After four consecutive monthly increases of 0.2%, headline CPI is seen rising by 0.3%. Given the base effect, this means the year-over-year rate may tick up to 2.7% from 2.6%. The core rate is expected to rise by 0.3% for the fourth consecutive month. Depending on om the rounding, the year-over-year rate may hold steady at 3.3%., which matches the average since May, underscoring the lack of improvement. The year-over-year increase in producer prices may also accelerate a little. On balance, trying to take the Fed's point of view, there is no compelling need to cut rates at the conclusion of its meeting on December 18. The central bank can be patient. It need not cite it, but a standpat decision may also be broadly consistent with the greater fiscal policy uncertainty post-election. However, after the tick up in the unemployment rate, the market boosted the chances of a Fed cut to almost 88% from around 70%. The market seems more confident than the Fed, and the Fed rarely goes against such a strong consensus. However, as was the case in September, the Fed's quiet period covers the CPI report. Many suspect Fed Chair Powell himself planted a story in the media to prepare the market for the half-point move that was delivered. Of course, history does not repeat itself, but it was the not the first time or probably the last time, the tactic will be employed.
The Dollar Index initially fell on the jobs report. It reached nearly 105.40, its lowest level since November 11. It has retraced a little more than half of the post-election rally. DXY recovered but stalled near 105.85. Resistance in in the 106.20-40 area. Recall that the Dollar Index rallied every week in October and the first four weeks in November. It fell nearly 1.7% in the last week of November and settled little changed last week. On the downside, a break of 105.40 signals a test o more important support in the 105.00-15 area.
Eurozone: The European Central Bank meets on December 12. There is a compelling case for the continuing easing of the monetary restriction. The issue the market has been wrestling with is whether it will be a half-point cut or another quarter-point move. The odds of a 50 bp cut have trended lower since peaking on November 22 with the dreadful flash PMI. It now stands at less than 10% compared with almost 50% at the pea. Europe has not found its balance since the pandemic. It has been one shock after another, and the initial conditions were not so favorable (incomplete monetary union, little progress toward fiscal union). The early winter and weaker wind have boosted the demand and price of gas. The re-election of Trump in the US with tariff threats compounds the economic challenges amid the changing trade ties with China. The increase in November headline inflation (2.3% vs. 2.0%) was largely a function of base effects for fuel, and well known by policymakers. It does not stand in the way of easier policy, and, in fact, the slowing of service price inflation, to the lowest in three years (3.9%), likely boosts official confidence. The swaps market has about 100 bp of cut discounted for H1 25. The Swiss National Bank meets, and it too will deliver another rate cut. The market leans slightly toward a 50 bp cut, but this seems aggressive given that the deposit rate is already 1.0%. Although the central has indicated it will return to negative rates, if necessary, it likely will be cautious. Still, the franc is firm against the euro, approaching the year's high. It was the recognition of the importance of the exchange rate for the SNB that allow us to anticipate the first SNB rate cut in March.
The euro ran up to $1.0630 immediately after the US jobs report but reversed lower and fell to almost $1.0550. The pre-weekend high may have completed the upside correction from the November 22 low (~$1.0335). Initial support now may be in the $1.0480-$1.0500 area, while a break of $1.0450 sends it back to last month's low. When everything was said and done last week, the euro settled slightly softer. And this was despite the narrowing of the US two-year premium over Germany. In the past two weeks, the US premium has narrowed by 30 bp after rising by slightly more than 40 bp in the previous three weeks. Around 208 bp, it is the narrowest since the Fed cut rates on November 7.
Canada: The Bank of Canada has emerged this year as one of the most aggressive G10 central banks in cutting rates. Although Canada's full time jobs growth accelerated to 54k (which in proportional terms would be as if the US created 550k full time jobs instead of losing them. But the jump in the unemployment rate to 6.8% from 6.5% may scare policymakers. Between the jump in the unemployment rate and the sharp slowing of wage growth (3.9% vs. 4.9%), the market is feeling more comfortable with a 50 bp rate cut by the Bank of Canada. The odds in the swaps market rose to Its easing cycle began in June, and three quarter-point cuts were delivered before the half-point move in October. The swaps market has a little more than a 75% chance of another half-point cut, which would bring the overnight target rate to 3.25%. The odds were slightly above 50% at the start of last week. The swaps market puts the target rate slightly near 2.75% by the middle of next year.
The US dollar raced to CAD1.4155 at the end of last week. A four-year high was seen in response to Trump's tariff threat near CAD1.4180, and that seems to be the next obvious target. Above there the charts show little until the 2016 and 2020 highs in the CAD1.4670-90 area. The momentum indicators had eased, even though the greenback still worked its way higher in recent weeks, but the indicators appear to be curling up again. Still, the greenback settled above its upper Bollinger Band (~CAD1.4125). The US dollar tested the 20-day moving average three times last week and it held. It has not settled below it since the US election.
Australia: The Reserve Bank of Australia meets the first thing Tuesday, December 10. It is steadfastly on hold. The derivatives market does not have a cut fully discounted until well into April. Either a dramatic easing of core price pressures or a collapse of economic activity is required to get the RBA to move sooner. Australia reports November jobs data on December 12. Australia's labor market is faring better than the rise in unemployment from 3.9% at the end of 2023 to 4.1% in October suggests. Consider that Australia created almost 390k jobs in the first ten months of the year, slightly more than the 380k in the Jan-Oct 2023 period. Moreover, of those jobs, nearly 300k full-time posts (167k in the same 2023 period). The challenge was that participation rate increased to 67.1% from 66.5% at the end of 2023. It is gradually absorbing a large increase of (potential) workers.
The Australian dollar broke down ahead of the weekend, falling through $0.6400. Although the intraday low for the year (~$0.6350) is still a third-of-a-cent away, the Aussie did post its lowest settlement of the year before the weekend. It also settled below its lower Bollinger Band (~$0.6410). Ironically, of the four G10 central banks that meet next week, the RBA is the only one not cutting, and yet the Aussie was a miserable performer last week, slumping almost 2%. It was the largest weekly loss since July. The New Zealand dollar, where the central bank is engaged in an aggressive easing cycle, fell by around 0.5% less. The Aussie fell nearly twice the Canadian dollar's decline despite the heightened expectations of a 50 bp cut.
China: China's 30-year bond yield has fallen through Japan's. This is momentous and spurred a rash of commentary. To us, what is more significant is that the market requires a slightly lower yield on the dollar bond China recently sold than what the US Treasury pays. China's capital controls limit how savings can be deployed, but China's low inflation means that real rates are not an outlier. China's CPI and PPI are due before the markets open on Monday. In October, CPI stood at 0.3%. The nominal 10-year yield is about 2.0%. A simple exercise of deducting CPI from the nominal yield, produces a real rate of 1.7%. The US 10-year note yields about 4.2%. US CPI was 2.6% in October. Subtracting the latter from the former is 1.6%. China also may report November lending and trade figures. Lending figures should remain strong as the support efforts are implemented. Meanwhile, Chinese trade figures remain political charged. Despite protective tariffs on Chinese exports to the US, Europe and many emerging markets, China's trade surplus has grown nearly 16% this year. Through October, the surplus is in dollars is about $785.5 bln. In the first ten months of 2023, China's trade surplus was around $678.3 bln. In yuan terms, China's global trade surplus has risen by a little more than 21% this year.
The dollar rose by almost 0.5% against the offshore yuan last week. It was the eighth weekly increase of the ten weeks here in Q4. The greenback has also risen in eight of the past ten weeks against the Japanese yen. Some suggest the yuan is weakening to offset the tariffs Trump threatens, but this seems to obscure the fact that the PBOC has moderated the yuan's decline/dollar surge by setting the dollar's reference rate below prevailing market levels. Nearly all emerging market currencies have fallen since the US election. The greenback set a new high for the year early last week near CNH7.3150. It backed off to CNH7.2555 ahead of the weekend before rebounding above CNH7.28. Last year's high near CNH7.3700 is the next technical objective.
Japan: The Bank of Japan meeting concludes on December 19. Governor Ueda has made it clear that the meeting is live without making any commitment. Firmer Tokyo CPI, and a reasonably firm start to Q4 economic activity, including stronger exports, would seem to favor another hike. The data highlight in the week ahead is the December 11 November PPI report and the Tankan survey Japan’s PPI has risen from 0.3% year-over-year at the end of 2023 to 3.4% in October. The Q4 Tankan survey will be reported on December 13. Anecdotal reports suggest little improvement. The minority government approved a nearly JPY14 trillion (~$92 bln) supplemental budget, and the Diet is likely to approve it in the coming weeks. It draws on unused funds from past budget and will require the issuance of only JPU6.6 trillion of new debt.
The dollar traded last week in about a 1 1/3-yen range on both sides of JPY150. The issue is what kind of consolidative pattern has been forged. Is it a continuation pattern or a base/reversal pattern? It appears to be a triangle pattern, which is often seen as a continuation pattern, but it does not break out early next week, it will be too close to the apex to be meaningful. The upper end is near JPY150.65 on Monday and the lower end is around JPY149.50. Given the position of the momentum indicators and the likely increase in the US CPI, we are still more inclined to see an eventual upside break.
UK: The UK's economic performance in October is unlikely to move the Bank of England's needle for the December 19 MPC meeting. October GDP and details will be reported at the end of the upcoming week. September GDP disappointed with a 0.1% contraction (vs. median forecast in Bloomberg's survey for a 0.2% expansion). October retail sales were weaker than expected (-0.9% in volume terms) and the composite PMI fell to 51.8 in October (from 52.6), which was the lowest for the year (until November's fall below the 50 boom/bust level). The swaps market has slightly less than a 13% chance of a BOE cut next week. It has almost an 85% chance of a cut at the following meeting (February 6).
Sterling briefly traded above $1.28 after the US jobs data for the first time since November 12. It stops shy of the 200-day moving average (~$1.2820). Like the euro, it reversed lower and fell to new session lows near $1.2720. The upside correction since the November 22 low (~$1.2485), a five-month low, may have run its course. A break of the $1.2675-85 area would encourage such a view.
Mexico: With the November CPI on December 12, the path toward another rate cut a week later will be clear. The biweekly estimates are consistent with the headline rate unwinding the small gain in October. It could return to around 4.60% from 4.76%, which would the lowest since the end of Q1. The core rate may fall below 3.6% from 3.8% in October. The year-over-year core rate has not risen since January 2023, when it was at 8.45%. Brazil's central bank meets on December 11. It began a tightening cycle in September with a quarter-point hike but then followed it with a 50 bp move last month. The stronger than expected Q3 GDP, firm inflation readings and the drop in the Brazilian real to record lows against the US dollar warn that Brazil's central bank may turn more aggressive.
The US dollar settled near MXN20.1055 on the eve of the US election. The dollar fell for the second consecutive week. The low before the weekend was MXN20.1035. But, here too, the dollar recovered after the early losses. It rose to a new session high near MXN20.2825 near midday in NY before consolidating above MXN20.20. The greenback held below the previous session high near MXN20.3160. The dollar has not traded below MXN20.00 since November 8, the day after the FOMC's last rate cut. The peso's 0.8% gain last week made it one of the best performing emerging market currencies last week. In contrast, the Brazilian real, was the worst performer, shedding nearly 2%. Brazil's central bank meets on December 11, and the six economists Bloomberg surveyed look for at least a 75 bp hike in the Selic rate to 12.00. One looks for a 100 bp hike.
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