Overview: The US dollar is mostly consolidating in quiet
turnover against the G10 currencies to start the new week, which is widely
expected to see the Federal Reserve cut interest rates for the third time. The
Reserve Bank of Australia meets tomorrow and there is speculation that it may
signal its next move is a hike. The Bank of Canada is on hold. The Swiss
National Bank is reluctant to take its deposit rate, which is now at zero, back
into negative territory. Emerging market currencies are mixed. Both the Mexican
peso and Chinese yuan, which made new highs for the year last week, are
consolidating at slightly lower levels. Of note, the Thai baht is the strongest
among emerging market currencies despite the renewed hostilities with Cambodia.
Meanwhile, Chinese-Japanese tensions remain high.
Global equities are mostly higher. In the Asia Pacific area,
Hong Kong and mainland shares that trade there, India, and Australia are
notable exceptions. Taiwan and South Korea led the mixed regional performance
with more than 1% gains. Europe's Stoxx 600 is slightly firmer near midday, as
are US index futures. Bonds, however, are under pressure. Japan and Australia's
10-year yields are around two basis point higher, while New Zealand's benchmark
jumped eight basis points. European yields are 3-4 bp higher. The US 10-year
Treasury yield is more than a basis point higher to near 4.15%, which is a new
high since November 20. It has not been above 4.20% since early September. Gold
is little changed, hovering near $4200. January WTI settled last week slightly
north of $60 but is back below there now and is threatening to take out last
Friday's low near $59.40.
USD: The Dollar Index has forged a low in the last few
sessions around 98.75-98.80. That area holds the (38.2%) retracement of the
rally since the year's low was set on September 17 when the Fed delivered the
first rate cut of the year. Tomorrow's October JOLTS report and Wednesday's Q3
Employment Cost Index may attract some attention, but the focus is on the
outcome of Wednesday's FOMC meeting, and the forward guidance provided by the
updated Summary of Economic Projections. The Federal Reserve may also say
something about the balance sheet amid expectations that it may buy T-bill to build
bank reserves. Market participants are well aware of the pattern that has seen
the dollar rally after September and October rate cuts. Ahead
of the rate cuts, the dollar was sold. Two-year Treasury yields soften in
anticipation of the rate cuts and increased after both moves. Yet, the two-year
yield rose about eight basis points last week. The 10-year yield also rose
after the September and October moves, but it rose a dozen basis points last
week to reach its highest level in two and a half weeks.
EURO: The euro spent last Friday in about a 20-tick range on
both sides of $1.1650. The euro stalled last week slightly in front of the
(50%) retracement of its losses from the year's high set September 17 near
$1.1920. For four sessions, the euro has traded between about $1.1620 and
$1.1680. Following on the heels of the pre-weekend news that October factory
orders surged 1.5% (after a revised 2% jump in September from 1.1% initially),
German reported a 1.8% jump in industrial output, the largest gain since March,
after a revised 1.1% rise in September (initially1.3%). It is the best
two-month performance since 2021. The flurry of activity seen in Q1, when
industrial output rose by an average of 0.9% a month, was a fluke. In the
subsequent six months, industrial production fell by an average of 0.5% a
month. Germany's October trade figures will be reported tomorrow, but through
September, the drop in industrial output has not stopped exports from rising.
They have risen by 0.1% a month on average in the first nine months of the
year, the same as in the January-September 2024 period. And despite the rise in
exports, the trade surplus through September is about 20% smaller than a year
ago at about 151 bln euros.
CNY: After falling to new lows for the year in the middle of
last week, near CNH7.0540, the greenback consolidated in the last two sessions
and continues today. It has remained below CNH7.0720. A move above there could
target the CNH7.08-CNH7.09 area. The PBOC set the dollar's reference rate at a
new low for the year last Thursday (CNY7.0733), it was set a little higher on
Friday (CNY7.0749) and slightly higher today (CNY7.0764). The data China
reports this week are politically sensitive: trade figures and inflation.
Today's November trade figures showed that despite the decline in exports to
the US this year, China overall exports have grown, and the trade surplus is
larger than it was a year ago. It has averaged $97.86 bln a month this year and
$80.67 bln in the first 11 months of 2024. Even if China was a parliamentary
democracy, the share scale is daunting. We have pushed back against arguments
that claim China is export driven. The PRC exports about 20% of GDP, which is
at the lower end of G10 countries, though not as low America's 10-11% export
share. However, its 20% is large, and many critics argue it is ill-gotten
through various state-aid. Exports in dollar terms were up 5.9% year-over-year
in November after a 1.1% decline in October. Imports rose 1.9% in November
after a 1.0% increase in October. The overall trade surplus stood at $111.68
bln, the largest since June. Early Wednesday, Beijing will report November CPI
and PPI. China's year-over-year measure of CPI is projected to rise 0.7%, which
would be the fastest this year, matches last year's high, and was last higher
than that in February 2023. Deflation in producer prices will continue, but it
is expected to moderate for fourth consecutive month. The median in Bloomberg's
survey anticipates the least deflation since August 2024.
JPY: The dollar has been trending lower against the yen
since the peak on November 20 near JPY157.90. It frayed the JPY154.65 level on
an intraday basis last week, which corresponds to the (38.2%) retracement of
the greenback's leg up since October 17 low (~JPY149.40), the last time the
dollar traded below JPY150. Yet the dollar did not settle below it once, and,
in fact, it settled a three-day high before the weekend. It made a marginal new
three-day high today near JPY155.55. If this part of the dollar's retreat is
over, initial resistance may extend toward the JPY156.10 area. Japan's October
labor earnings were reported earlier today. Cash earnings rose 2.6% year-over-year
after a revised 2.1% increase in September (initially 1.9%). Real earnings fell
by 0.7% year-over-year in October after a 1.3% decline in the year through
September. We learned at the end of last week, the household spending
unexpectedly collapsed by 3% in the 12 months through October (owing to a
pullback on spending on housing and transportation). Japan also took another
look at Q3 GDP and now estimates the economy contracted by 0.6% (instead of
-0.4%), though private consumption rose 0.2% instead of 0.1%. Lastly, Japan
reported a JPY2.9 trillion current account surplus in October. In the first ten
months, Japan's current account surplus is about 14% larger than it was in the
same year ago period. Through October, the yen has appreciated by about 2%
against the dollar. That would seem to imply that Japanese investors are not
only recycling the current account surplus, but they have also offset the
foreign capital inflows.
GBP: Sterling performed well last week, rising for the
fourth week in the past five. It appreciated by about 0.75% against the dollar
and reached its best level (~$1.3385) since October 22. The advance met the
(50%) retracement objective of the sell-off since September 17's high
(~$1.3725). The next retracement (61.8%) is near $1.3450. However, some
consolidation looks likely before the next leg up. It slipped to a marginal new
three-day low today near $1.3315. Initial support may be in the $1.3280-$1.3300
area. The data highlight of the week is the October GDP on Friday. A small
increase is expected. However, the real focus is on next week's central bank
meeting. The market is confident of a quarter point cut.
CAD: Ahead of the weekend, the market reacted dramatically
to the November employment report. The sharp drop in the unemployment rate to
6.5% from 6.9% seemed to capture the market's imagination, even though half of
it could be accounted for the drop in the participation rate. Moreover,
full-time positions were lost (9.4k). It was the first back-to-back full-time
job losses since February-March. The Canadian dollar rose by about 0.85%, the
most since late May. The greenback traded a little through the (50%)
retracement of its rally since the year's low was recorded in mid-June
(~CAD1.3540). The greenback is trading quietly in narrow range in the
pre-weekend trough (~CAD1.3815-CAD1.3845). The next retracement (61.8%) is
about CAD1.3770. The Bank of Canada meets on Wednesday and none of the 21
economists in Bloomberg survey expect a change in policy. The central bank cut
its overnight lending rate by 100 bp this year, with the last cut in October.
It delivered 175 bp of cuts last year. The market believes the easing cycle is
complete and has become more convinced after the fiscal expansion announced in
the government's new budget. In fact, after the jobs data the swaps market
swung sharply to nearly fully discount a hike by early Q4 next year.
AUD: The Australian dollar has rallied in 10 of the past 11
sessions coming into today's activity. In this span, it has risen from a
three-month low (~$0.6420) to its highest level since the day after the Fed cut
rates on September 17, near $0.6650. The high from the year recorded on
September 17 was a little above $0.6705. Ahead of the weekend, it settled above
its upper Bollinger Band, which is found near $0.6550 today. This area has
capped it today, and the Australian dollar held above $0.6630. Initial support
is seen in the $0.6600-20 area. The Reserve Bank of Australia meets the first
thing tomorrow. The market not only thinks that RBA is done cutting, with a
relatively short cycle of 75 bp, but that the first hike may be delivered
before the end of next year.
MXN: Sellers drove the dollar to new lows for the year
against the Mexican peso in early North American hours ahead of the weekend.
The low was recorded Mexico before midday near MXN18.1525. The greenback
finished last week below its lower Bollinger Band, found around MXN18.1675
today. Often previous support becomes resistance. Initially, that may be in the
MXN18.20-MXN18.25 area. Today's high (~MXN18.2335) in that range. Mexico
reports its vehicle production and exports today, ahead of tomorrow's November CPI.
Through October, Mexico has produced almost 3.40 mln cars and light trucks
(3.41 mln in the first ten months of 2024). It exported 2.88 mln vehicles this
year or nearly 85% (2.93 mln in the same period last year or about 86%). The
speaks to the scale, we discussed with China's trade. China exports around 20%
of its light vehicle production, of which 20% are not Chinese brands but from
foreign companies to design and produce cheaper in China. While the peso
strengthened ahead of the weekend, the Brazilian real was crushed. It was the
weakest currency in the world last Friday. It was stomach-punched for 2.5%,
apparently on news that former President Bolsonaro will support his son,
Flavio, who is a senator, to be president next October. Many had thought Bolsonaro
was going to back Sao Paulo Governor Tarcisio de Freitas, who seemed to have
the best chance to beat Lula, who plans to seek an unprecedented fourth terms
next year. The dollar jumped to almost BRL5.4850, its highest level since
mid-October. The high set in October, which itself was a two-month high, was
slightly above BRL5.52. The 200-day moving average is a little higher
(~BRL5.53) and the dollar has not closed above it since mid-April.
Reviewed by Marc Chandler
on
December 08, 2025
Rating:
