End-of-Year Market Summary and Outlook

Market Overview

The final trading session of the year saw the US dollar weaken in reaction to the Federal Open Market Committee’s (FOMC) recent policy announcement. Limited selling momentum has persisted across Asian and European markets, while North American participants returned to a mixed greenback performance. The Swiss franc emerged as the strongest currency, buoyed by the Swiss National Bank’s decision to maintain its key policy rate at zero and reiterate a high threshold for deploying negative interest rates.

Conversely, Australia’s underwhelming labor data prompted the market to delay expectations of the first rate hike next year, triggering profit-taking pressure on the Australian dollar. Emerging market currencies presented a mixed picture. China’s central bank set the US dollar reference rate at its lowest level since last October, supporting gains in both onshore and offshore yuan.

Most major Asia-Pacific equity indices declined, possibly influenced by disappointing earnings from Oracle. Exceptions within the region included Australia, New Zealand, Singapore, and India. In Europe, the Stoxx 600 advanced slightly, extending gains from the previous session. Meanwhile, US equity futures were subdued, with the S&P 500 down roughly 0.5% and the Nasdaq Composite down approximately 0.7%.

Bond markets reflected these dynamics: Australia’s 10-year government bond yield dropped by nine basis points following poor employment figures, and Japan’s 10-year government bond yield eased by two basis points. European benchmark yields were mixed in a narrow range. The US 10-year Treasury yield remains near 4.14%, down modestly from a near 4.20% peak yesterday. Gold prices remain within recent trading bands, currently holding above the $1,420 level. Meanwhile, January West Texas Intermediate (WTI) crude oil futures softened to nearly $57.50 per barrel, nearing the monthly low recorded last month around $57.10.

United States Dollar (USD)

The FOMC meeting introduced renewed volatility to the Dollar Index, which breached the lower boundary of its four-day range between approximately 98.75 and 99.30, dipping close to 98.50. Technical analysts may now look towards support around 98.30, representing the 50% retracement of the appreciation that began after the September 17 rate cut. Further downside could extend to 97.80, near the 61.8% retracement level.

The Federal Reserve delivered a rate cut accompanied by hawkish commentary. Notably, next year’s GDP projections were revised upwards, while the median forecast of one rate cut in 2026 remained unchanged. Voting dissent was evident: Chicago Fed President Goolsbee and Kansas City President Schmidt preferred pausing rates, while Governor Moran advocated for a larger 50 basis point cut. In a distinct policy move, the Fed announced a $40 billion purchase of Treasury bills for reserve management, separate from traditional monetary policy.

Weekly US jobless claims are expected to rebound following distortions tied to the Thanksgiving holiday. Attention will turn to September trade figures amidst ongoing tariff considerations. Through August, the US averaged a monthly trade deficit of $89.2 billion, compared to $71.4 billion in the first eight months of 2024. Export growth has moderated slightly in the recent period, while imports have generally declined through August but exhibited a modest rise in 2024.

Euro (EUR)

Following the FOMC announcement, the euro climbed to $1.1700, marking its best level since mid-October. It reached nearly $1.1710 during early Asian trading before some profit-taking pushed it back to about $1.1680. The currency retested highs near $1.1730 in European hours and is now consolidating. Key technical resistance lies around $1.1750, near the 61.8% retracement of earlier losses.

The eurozone’s economic calendar remains quiet until Monday’s aggregate industrial production release for October. The European Central Bank (ECB) will meet next week, with expectations that policy settings will be maintained. Nevertheless, market pricing shows a slight bias toward a potential rate hike in late 2025, consistent with recent remarks by ECB President Lagarde. The recent increase in short-term European yields—ranging from 17 to 30 basis points—raises concerns about premature tightening.

The Swiss National Bank maintained its deposit rate at zero, revising inflation forecasts downward for 2026 and 2027 and slightly increasing GDP growth expectations to 1% for next year. The euro reached a three-month high against the Swiss franc (~CHF0.9395) before retreating to last week’s lows (~CHF0.9325). The threshold for a return to negative rates remains elevated.

Chinese Yuan (CNY)

Over the past 30 sessions, the correlation between fluctuations in the Dollar Index and the USD/CNH has hovered near 0.65, close to the upper range for the year. Efforts to curb yuan appreciation are complicated by the dollar’s recent weakness post-FOMC. In December, the USD/CNH has fluctuated between roughly 7.0540 and 7.0770. The pair reached a near-year low of approximately 7.0530 today.

The People’s Bank of China (PBOC) set the daily USD reference rate at 7.0686, its lowest since October 2024 and a 0.09 decline from the prior day—the largest drop in nearly three months. This contributed to the dollar dipping toward 7.0573 against the yuan.

Japanese Yen (JPY)

The combination of easing US Treasury yields and broad dollar selling weakened the USD/JPY to near 155.80, nearly erasing Tuesday’s gains. This level aligns with the upper boundary of a support band between 155.35 and 155.50, corresponding closely to a 61.8% retracement of the recent rebound from a low near 154.35.

Despite a 24 basis point rise in Japan’s 10-year government bond yield over the past month, US and European yields have increased only marginally or moderately. JGB yields have slipped slightly in the past week, outperforming most G10 counterparts.

Two key factors underpin this environment: first, Japan’s persistent current account surplus continues facilitating significant foreign capital recycling, which tends to moderate yen appreciation despite higher yields. Second, increases in yields across major economies primarily reflect expectations of monetary policy tightening rather than shifts driven by Japanese rates.

British Pound (GBP)

The British pound appreciated close to $1.3390 yesterday, reaching its highest level since late October. It edged nearer to $1.3400, representing the 50% retracement of losses from the year’s peak (~$1.3790). A decisive break above $1.3400 could target $1.3450.

Support emerged around $1.3375 in early European trade. The Bank of England is anticipated to deliver further policy easing, with the swaps market pricing nearly a 90% probability of a 25 basis point cut next week. Markets fully discount one additional cut next year, with conditional probabilities increasing for a further reduction by mid-2026.

Canadian Dollar (CAD)

The Bank of Canada’s recent decision to hold its policy rate steady resulted in a neutral market stance. The Canadian dollar fluctuated as the US dollar broadly weakened post-FOMC, retreating to around CAD1.3785 against the greenback, posting an outside down day.

The USD/CAD pair has consolidated near the lower end of yesterday’s range, remaining below CAD1.3825. The 61.8% retracement of the dollar’s rally since mid-June lies near CAD1.3770, with a break below that level potentially signaling a decline toward the CAD1.3725-30 region.

Canada’s September merchandise trade balance is scheduled for release today. US tariffs continue to impact Canada’s trade deficit, which expanded to an average monthly shortfall of C$3.65 billion through August, compared with C$0.645 billion in the first eight months of 2024. The average merchandise trade deficit widened significantly to more than C$5.25 billion in the three months through August, up from less than C$0.9 billion in the same period last year.

Australian Dollar (AUD)

The US dollar’s decline following the FOMC meeting propelled the Australian dollar above its recent resistance near $0.6650, reaching roughly $0.6685, approaching the year’s high established mid-September (~$0.6705). Beyond this level, technical resistance is sparse until near $0.6800.

However, disappointing November labor market data triggered profit-taking. Australia reported a loss of slightly over 21,000 jobs in November, contrary to market expectations for a gain of around 20,000. Full-time employment decreased by 56,500, outweighing part-time job increases from the prior month. The labor market slowdown has persisted throughout 2024, with average monthly job creation roughly half of last year’s pace. The unemployment rate rose to 4.3% in November, after remaining stable at or near this level since June. The labor force participation rate decreased modestly to 66.7% from 66.9%.

Futures markets have trimmed the probability of an interest rate hike by mid-2026 to about 87%, down from a previous slight bias toward a 50 basis point move.

Mexican Peso (MXN) and Brazilian Real (BRL)

The US dollar retreated against the Mexican peso after the FOMC meeting, approaching but failing to breach the year’s low set recently near MXN18.1525. Yesterday’s selling pressure halted around MXN18.1575, with the pair consolidating within a range of MXN18.1560 to MXN18.2235 today.

Mexico’s central bank will release its regional economic report today, a typically low-impact event. The market will focus on tomorrow’s October industrial production data, where a Bloomberg consensus projects a modest 0.1% monthly gain—the first increase in five months. Coupled with the recent higher inflation print for November, this may prompt Banxico to signal a pause following the anticipated rate cut next week.

In contrast, the Brazilian real remained resilient against the greenback, reaching a near two-month high on Tuesday close to BRL5.4950, before retreating slightly but concluding at its highest level since mid-October. Despite near-term weakening, the central bank indicated that maintaining current rates for a “very prolonged period” is necessary to achieve inflation targets, damping expectations of an early 2025 rate cut amid significant uncertainty.

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This report will be followed by the weekly update scheduled for Saturday, December 13. The monthly outlook for January will be published on January 3.