by Marc Chandler
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Overview: The dollar is offered. Neither the 227k rise in nonfarm payrolls, nor the above 3% Q4 growth that the Atlanta Fed sees the economy tracking, or the uptick in November CPI expected to be reported on Wednesday has been sufficient to dampen speculation of a rate cut next week. The futures market has a nearly 88% chance discounted. The antipodean currencies and Scandis are leading the move, ostensibly encouraged by the pro-growth signals from China's Politburo. The yen is the laggard. A speech now planned for mid-January by a deputy governor of the BOJ that could be used to flag a rate hike has seen speculation of a hike next week fade a bit. Emerging market currencies are mixed. The South Korean won is the weakest, following last week's drama, it is off 0.65% today. Central European currencies are mostly firmer along with the Mexican peso and Thai baht.
China's announcement helped local shares recoup some of the earlier losses, but the CSI 300 still settled fractionally lower. The Hang Seng and mainland shares that trade there rose 2.75% and 3.15%, respectively. Korea's Kospi was punched 2.8% lower and the KOSDAQ was rocked for 5.2%. Europe's Stoxx 600 has a seven-day advance in tow coming into today and is up marginally in the morning turnover. US index futures are nursing negligible losses. Benchmark 10-year yields are mixed. They fell in the Asia Pacific region, partly catching up. The 10-year Chinese government bond yield slipped three basis points to a new low near 1.91%. European yields a narrowly mixed. The French and peripheral premiums are slightly narrower. The 10-year US Treasury yield is up a little more than one basis point to approach 4.17%. Gold caught a bid. It is near a seven-day high (~$2656). Syrian developments may have spurred some demand but news that China's central bank bought gold for reserve for the first time in seven months seemed to be the more important trigger. A trendline off the last October and November highs comes in tomorrow a little below $2680. January WTI held above the pre-weekend low (slightly below $67) and has risen back above $68 today.
Asia Pacific
China kicked off the week with its November inflation gauges. Consumer prices disappointed. The 0.2% year-over-year increase was half of what was expected. Ut is the third consecutive decline. In November 2023, China's CPI stood at -0.5%. Although weak demand is a common narrative, the fact of the matter is that it was mostly about food prices. Consider that food price inflation slowed to 1.0% for 2.9%, while non-food prices were flat after falling 0.3% year-over-year in October. Core prices, which exclude food and energy rose 0.3%, the fastest pace in three months. Producer prices have fallen on a year-over-year basis without fail since October 2022. It was 2.5% below year ago levels in November, after a 2.9% fall in October, at the lowest level of the year. Producer prices are incomes, and the weakness bodes ill for industry profitability. Several PBOC loans come due this month and because of that many expect the central bank to cut reserve requirements ahead of the end of the year. Separately, the Politburo issued an important statement a couple of days ahead of the Central Economic Work Committee. The Politburo announced shift in monetary policy to "moderately loose" and reiterated pledged to stabilize the property and stock market and increase the extraordinary counter-cyclical policy. Meanwhile, a speech planned for mid-January by Himino, a Deputy Governor of the BOJ, has boosted speculation of a rate hike then rather than next week. The swaps market has a little more than six basis points of a hike discounted for next week and more than 17 bp for the January meeting. Before the weekend, nearly 16 bp were discounted for next week. Comments by Japanese officials may be more important for market expectations this week than the data; the highlight being the Tankan survey at the end of the week. The Reserve Bank of Australia meets first thing tomorrow. There is little doubt over the outcome: standpat. Although Q3 GDP disappointed, Q4 has begun on solid footing with stronger than expected retail sales, household spending, and the strongest jump in goods exports since August 2023. These seems to little compelling reason to expect RBA Governor Bullock to change her tune.
The rolling 30-day correlation between changes in the 10-year Treasury yield and the dollar-yen exchange rate eased to around 0.65, which is around a one-month low but still high enough to take seriously. The 10-year yield fell to the lowest level since October 21 before the weekend. Earlier last week, the dollar had fallen to JPY148.65, the lowest level since October 11. The dollar is consolidating within the pre-weekend range but is firm near JPY150.45 in late European morning turnover. Initial resistance is seen in the JPY150.70-80 area. Half of last week's 2.1% drop in the Aussie took place ahead of the weekend, and it fell slightly below $0.6375. It held above the trendline drawn off the 2022 and 2023 lows, which comes in $0.6360 at the end of next week. The announcement by China's Politburo appeared to help fuel the Australian dollar's recovery today. It has rebounded to approach last Friday's high near $0.6455. Resistance is seen in the $0.6570-$0.6600 area. The rolling 30-day correlation between changes in the yen and yuan has been between 0.6 and 0.7 since the US election. It is at the lower end of that range now. The dollar reached a new high for the year against the yuan on December 3 near CNH7.3150. It has consolidated since and held above the 20-day moving average (~CNH7.2550). The dollar rose to a three-day high near CNH7.2925 today before it retreated to CNH7.2675. The PBOC continues to set the dollar's reference lower than prevailing rates. The purpose of which is to limit the pace of the yuan's decline. Of course, Beijing wants to protect itself from Trump's tariffs, but it does not appear to be seeking it via the FX market. The PBOC has lower the dollar's reference rate in 8 of the past ten sessions before today. Today's fix was set at CNY7.1870 (CNY7.1848 before the weekend).
Europe
The ECB and SNB meetings on Thursday, and the UK's October GDP the day before are the highlights this week, which begins slowly. There is now little doubt that the ECB will deliver a quarter-point cut. The market toyed with the idea of a larger move but now sees the changes are negligible. Between now and the middle of next year, the swaps market sees roughly 125 bp of cuts. It currently sees a terminal rate around 1.75%, which is 150 bp below the current target. Even if less impactful, the SNB may be more interesting. The market is split between a quarter- and a half-point move. The SNB may be getting more concerned about the exchange rate. The small cushion ahead of the US election has practically disappeared. The franc has appreciated by about 1.25% against the euro in the past month. Switzerland's inflation EU-harmonized CPI has been below 1% since August. In their domestic measure, goods prices are off 0.9% year-over-year and service prices are up 1.8% year-over-year. We suspect the SNB will move 25 bp, which is more significant given the current deposit rate of 1.0% than a quarter-point cut from the ECB current 3.25% deposit rate. The UK's October GDP may pose some headline risk, the impact on the BOE's deliberations is likely minimal. There is practically no chance of a cut next week (December 19). Governor Bailey suggested scope for four rate cuts next year. Perhaps the reason, it did not appear to have much impact, is that the market was nearly there already. The swaps market discounts around 85 bp of cuts in 2025.
The euro jumped to $1.0630 after the US jobs data but reversed low and fell to almost $1.0540. It still managed to settle above the 20-day moving average for the second consecutive session. Follow-through selling took it slightly through $1.0535 in Asia Pacific turnover but caught a bid that has carried through the European morning and lifted the euro almost half-a-cent. There are 1 bln euro options at $1.06 that expire today and 1.35bln euros of options at $1.05 that expire tomorrow. Sterling's price action was broadly similar. It reached $1.2810 after the US jobs report, its best level since November 12, where it met strong sellers that took it to a new session low near $1.2720. Follow-through selling today saw it approach $1.2715 before rebounding to new session highs near $1.2785. A close above $1.2820 would lift the technical tone.
America
The new week begins with a light economic calendar. The focus is on US price measures on Wednesday and Thursday. The rise in the unemployment rate last month to 4.2% from 4.1% despite the fall in the participation rate (62.5% vs. 62.6%) may have been the driver of heightened expectations of a Fed cut next week. We note that the Atlanta Fed's GDP tracker see 3.3% growth this quarter (after 2.8% growth in Q3), which, if borne out, would be the fastest pace since Q3 23. With the S&P and NASDAQ at record highs and Bitcoin north of $100k, does the economy or the financial markets need easier policy, even if the impact is with a lag? Canada job growth was strong, with 54k full time jobs being filled. That is nearly 200k full time positions in the past three months, the most since the three-month period that ended in January 2023. However, Canada is not creating jobs as fast as the workforce is increasing and this is generating higher unemployment. Unemployment rose to 6.8% from 6.5% as the participation rate rose to 65.1% from 64.8%. Wage growth slowed to 3.9%, the slowest since April 2022. The market boosted the odds that the Bank of Canada will cut 50 bp this week to a slightly more than 80% from a little more than 50% a week ago. Mexico has the most important data in North America today: November CPI. The continued downtrend in price pressures will encourage speculation of a rate cut next week.
The increased prospect for another large cut by the Bank of Canada sent the Canadian dollar a new closing low for the year. The greenback stormed ahead from CAD1.4020 to CAD1.4165. It was the biggest single day advance of the year and returned to almost the level seen in response to Trump's tariff threat (~CAD1.4180). Follow-through buying brought the US dollar closer to CAD1.4175 today before profit-taking pushed the greenback toward CAD1.4130 in Europe. Support may be found near CAD1.4120. The dollar fell to the session low near MXN20.1035 after the US jobs report. The greenback recovered to a new session high around MXN20.2825 before consolidating in the North American afternoon. Although the dollar held above MXN20.15, it has taken it out today and slipped top about MXN20.1250. The low since last month's election was recorded on November 7, when the Fed delivered a quarter-point cut, near MXN19.76. It has not traded below MXN20.06 since the following day.
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