Overview: The outcome of the FOMC meeting is the main focus today. With the market discounting at least two cuts next year compared with the median projection in September that one cut would be appropriate, it is difficult not to anticipate a hawkish cut. The greenback has rallied after both the September and October rate cuts. The Bank of Canada also meets today. While there is no doubt that it will stand pat, the issue is how much it pushes against creeping expectations for a rate hike in H2 26. The US dollar has a slightly softer tone mostly within the ranges seen yesterday. The Canadian dollar is the laggard and is nearly flat. Most emerging market currencies are firmer against the greenback. The PBOC set the dollar's fixing slightly lower for the first time in four sessions today. Its November CPI rose to 0.7% year-over-year, matching the highest since February 2023. Deflation in producer prices unexpectedly deepened slightly.
Equities in the Asia Pacific region were mixed today, while the sell-off in Europe's Stoxx 600 has extended into the fourth session today. US index futures are also softer. Meanwhile, the sell-off in bonds is deepening. Australian and New Zealand 10-year yields rose 4-5 bp. Ironically, Japanese 10-year yields were an exception as rates ticked lower. European benchmark 10-year yields are 2-5 bp higher and several countries are seeing yields at their highest in six months. The 10-year Treasury yield is poking above 4.20% for the first time in three months. Gold continues to straddle the $4200-level in uninspiring trade. January WTI, which tested $60 earlier this week, is now near $58, the lower end of its recent range.
USD: The market is more dovish than the Federal Reserve. In September, the median "dot" was for one rate cut in 2026. The Fed funds futures are now pricing in two cuts and there is a small chance of a third cut. Talk of a hawkish cut today is based on little change in the median dot. The market may be influenced by the change at the helm, with Powell's term as Chair ending in May 2026. Hassett, the Director of the National Economic Council, is seen as Powell's most likely successor and more dovish than Powell. Ahead of the September and October rate cuts, the dollar drifted lower and then after the cuts were delivered: Sell the rumor buy the fact. The Dollar Index set last month's high near 100.40 on November 21 and ground down to about 98.75 last week. It reached 99.30 yesterday, a five-day high. It is in a narrow 99.00-99.25 range today in quiet turnover. A move above 99.40-50 could signal a run at last month's high.
EURO: The euro has been able to make little headway despite the US two-year premium over Germany narrowing to its lowest level since last September near 142 bp. Recall, it was above 160 bp in late October/early November. In September 2024, it bottomed around 136 bp. The market feels comfortable that the ECB's monetary cycle is over. It has been pricing in a small chance of a hike at the end of Q3 26. ECB President Lagarde endorsed the view and more will likely be forthcoming at next week's press conference following the ECB meeting and the updated staff forecast. The French parliament approved the social security financing bill, making it more likely to pass the 2026 budget (the debate begins Monday) but the French 10-year premium over Germany is wider today. In a rising interest rate environment, it is not unusual for the peripheral premiums over Germany to widen. A euro move above $1.1695, the (50%) retracement of the losses seen since the year's high was recorded on September 17 (the first Fed cut this year) is needed to re-start the upside momentum. On the downside, support is seen in the $1.1600-10 area. Options for 3.44 bln euros are struck at $1.1610 expiring tomorrow. Lastly, Italy reported a 1.0% contraction in October industrial output. After a heady 2.7% surge in September, the pullback is sharper than expected. The aggregate eurozone estimate will be published on Monday. Recall that Germany reported a 1.8% jump (1.1% in September), French industrial production rose 0.2% (0.7% in September), and Spain's saw a 0.7% increase (0.3% in September).
CNY: Last Thursday's dollar range of roughly CNH7.0560 to CNH7.0720 continues to dominate activity. Judging from the PBOC's daily fix, Beijing is content to see the consolidation after the seemingly one-way market that took the dollar to a low for the year last week (~CNH7.0540). The PBOC set the dollar's reference rate slightly lower today. CNY7.0753 (CNY7.0773 yesterday) for the first time in four sessions. China reported November CPI and PPI earlier today. Consumer goods and food continue to exert a drag, but the headline rate rose 0.7% year-over-year, which matched the highest since February 2023. It stood at 0.2% in October, which was the most since January. Core consumer prices rose 1.2% year-over-year, the same as in October. Food prices rose by 0.2% (2.9% in October) and non-food prices rose by 0.8% (0.9% in October). Goods prices rose by 0.6% and services prices by 0.7%. Producer prices disappointed. Deflationary forces strengthened for the first time in four months. China's PPI stands at -2.2% after -2.1% in October. The IMF has called on Beijing to boost domestic demand, reduce investment and reliance on exports with greater urgency.
JPY: The dollar recorded its recent peak against the yen on November 20 near JPY157.90. It subsequently pulled back and reached JPY154.35 last week. With yesterday's gain, the greenback met the (61.8%) retracement of those losses. It is consolidating in a narrow range between about JPY156.55 and JPY156.95 so far today. The next technical hurdle is seen in the JPY157.00-20 area initially but looks set to challenge last month's high. Japan reported November producer prices in line with expectations. It rose 0.3% on the month for a 2.7% year-over-year pace. The swaps market is confident (~90%) that the Bank of Japan will hike rates next week. The tensions with China continue to be elevated. It is difficult to see a near-term off-ramp. Japan does become more vulnerable if an adversary were to control Taiwan. Japan is stepping up its military deployment to the Ryukyu Island chain. China has also taken some provocative military actions over the last couple of weeks. Beijing uses being wronged in the past to feed nationalism and this is true about Japanese actions in the 1930s and 1940s. Tokyo insists that Prime Minister Takaichi's recent remarks did not reflect a change in its stance in general or toward Taiwan. Earlier this year, US officials wanted countries to clarify their position toward Taiwan, and when Takaichi did, reports suggested the US was critical. Still, earlier today, a US State Department spokesperson said China's activity in the region do not promote stability and reaffirmed the US-Japanese alliance.
GBP: The UK and the US are the two G10 central banks still in an easing mode. The US will move today and the UK next week. The swaps market is pricing in 90% confidence of a BOE cut next week. Sterling enjoyed a strong bounce from $1.3180 on December 2 to $1.3385 on December 4. It drifted lower, and slipped slightly below $1.3290 yesterday, and posted a bearish outside day by trading on both sides of Monday's range and settling below its lows. Sterling approached the (50%) retracement of the latest leg up near $1.3280 and the next retracement is near $1.3260. However, there has been no follow-through sterling sales today and it is consolidating between about $1.3295 and $1.3325. There are options for GBP540 mln that expire at $1.3200 today. Meanwhile, sterling's bid against the euro has faded, as well. The euro peaked in mid-November near GBP0.8865. Its retreat helped give sterling traction against the dollar. However, in recent sessions, the euro has forged a base near GBP0.8720 though it has been unable to resurface above GBP0.8755.
CAD: The markets are as convinced that the Bank of Canada will stand pat today as much that the Federal Reserve will cut. The key issue is whether the central pushes back against expectations of a hike, which the swaps market has it around a 2/3 probability in September 2026 and fully discounted in October. The greenback tested CAD1.38, its lowest level since late September on Monday. It recovered to around CAD1.3860, which is holding so far today. It can rise to CAD1.3880-CAD1.3900 initially. More formidable resistance may be in the CAD1.3965-75 area.
AUD: Even with the RBA's hawkish hold yesterday, and the jump in Australian rates, the Australian dollar itself was unable to sustain the push above the $0.6650 cap that was violated on an intraday basis. It is still knocking on it today. The two-and-a-half-week 2.25-cent rally has stretched the momentum indicators. There are almost A$770 mln in options at $0.6650 that expire Friday. The year's high set September 17 (Fed Day), slightly above $0.6705.
MXN: Slightly firmer than expected November CPI appeared to help the Mexican peso recover from its initial losses. The US dollar initially extended Monday's recovery yesterday and reached nearly MXN18.31 before the selling pressure reemerged. The greenback fell to almost MXN18.17 yesterday and is consolidating quietly so far today. At the end of last week and on Monday, the dollar found support in the MXN18.1525-MXN18.1580 area. Headline CPI rose to 3.80% from 3.57%. It is the highest since June. The core rate rose to 4.43% from 4.20%, the highest since March 2024. The central bank targets 2%-4% headline and core CPI. The central bank forecasts headline and core inflation to fall toward 3% by the end of next year. This, and concerns about the economic weakness, still means that central bank will most likely cut its overnight rate target 25 bp to 7.0% next week. We suspect it may be a hawkish cut as the central bank may signal a pause after cutting rates 275 bp this year (counting next week's move).
Reviewed by Marc Chandler
on
December 10, 2025
Rating:
