### United States
The U.S. dollar is robust as it rises against all G10 currencies and nearly all emerging market currencies, with the exceptions of the Hong Kong dollar and the Indian rupee, which hit a record low earlier. The market anticipates today’s release of the U.S. November CPI data and tomorrow’s potential rate cuts from the European Central Bank and the Swiss National Bank. Reports suggest Beijing may allow the yuan to fall further, but the implications of this are uncertain given the dollar’s strength. China’s 10-year yield is at uncharted levels near 1.80%, spurring expectations of further monetary easing. The yuan has depreciated by 2.3% against the dollar this year, ranking it among the strongest global currencies.
Prior to the CPI release, futures markets suggest an 85% likelihood of a Federal Reserve rate cut next week, with a 100 basis point cut anticipated between now and the end of next year—approximately 25 basis points less than the median Fed projections from September. After U.S. indices fell yesterday, equities are mixed in the Asia Pacific region. The Stoxx 600 in Europe ended an eight-day rally and is currently flat, awaiting direction from the U.S. U.S. index futures show slight gains. European 10-year yields mostly softened, with Italian, Spanish, and Greek benchmark yields at three-month lows. The 10-year U.S. Treasury yield is firm near 4.23%, rising over the past two sessions from last week’s close of around 4.15%. Gold met resistance above $2700 for the first time in over two weeks and has since pulled back to $2675. Additionally, reports that the Biden administration is considering new sanctions on Russian oil are potentially boosting January WTI, which is near $69.20 compared to $67 a barrel on Monday.
### Eurozone
Tomorrow’s CPI is unlikely to deter Sweden’s Riksbank from cutting rates at its upcoming meeting. Recent Swedish production and consumption data indicate ongoing economic weakness, prompting the Riksbank to begin easing in May, with a quarter-point cut, followed by two more cuts and a 50 basis point reduction last month, bringing the policy rate to 2.75%. The swaps market has about half of the cut priced in.
Norway’s CPI figures were firm, with the underlying rate rising to 3.0% from 2.7%, marking the first increase since October 2023. The headline rate increased by 0.3%, exceeding expectations, while the year-over-year increase of 2.4% remains the slowest pace since the end of 2020. Norges Bank, however, is unlikely to change its policy at its December 19 meeting, with the market projecting the first cut by the end of Q1 2025.
The ECB is expected to cut key rates by a quarter-point tomorrow. Updated staff forecasts will likely indicate lower inflation and weaker growth impulses. The outcome of the Swiss National Bank meeting remains uncertain. The swaps market leans slightly toward a 50 basis point move, while there is a view that the opposite might occur, considering the deposit rate is already at 1.0%.
### United Kingdom
Yesterday, the British pound traded well, becoming the only G10 currency to gain against the U.S. dollar. However, it traded within Monday’s range and settled near the highs, posting its highest close (~$1.2775) in a month. Today, it has weakened slightly, reaching a four-day low in European turnover below $1.2715. Option-related demand may have influenced this movement, with notable options expiring today at $1.2725 and $1.2745. A break below $1.2685 would confirm a near-term top and likely lead to a move toward last month’s low (~$1.2485).
### China
China’s economic developments are closely watched as its 10-year yield hovers near record low levels, prompting expectations of further monetary easing. The yuan has depreciated against the dollar by 2.3% this year, ranking among the world’s strongest currencies. Meanwhile, speculation suggests that the Chinese government might be considering policies to allow further yuan depreciation to offset potential tariff impacts anticipated from the incoming U.S. administration. The People’s Bank of China (PBOC) bought 160,000 ounces of gold recently, marking the first such purchase since April, potentially contributing to gold’s recent price recovery.
### Japan
The Bank of Japan meets next week, with speculation about a rate hike shifting toward a potential January move. The swaps market’s odds of a December rate hike have significantly decreased. The yen remains under pressure, trading at a new two-week high near JPY152.80 against the dollar this morning in Europe. It is gaining for the third consecutive session, buoyed by a small rise in U.S. rates and shifting expectations of a BOJ rate hike. The next target is the JPY153.60 area, aligning with the 61.8% retracement of the decline from the November 15 high (~JPY157).
### Canada
The Bank of Canada is expected to cut rates again today, having initiated the easing cycle in June with several subsequent cuts, including a 50 basis point reduction in October. Despite strong full-time job creation in recent months, the unemployment rate rose to 6.8%, bolstering confidence in a half-point cut today, which would bring the target rate to 3.25%. The swaps market projects the rate between 2.50% and 2.75% by the end of next year. Preceding today’s Bank of Canada meeting, the U.S. dollar reached a new four-and-a-half year high against the Canadian dollar. This upward pressure aligns with the U.S. two-year premium over Canada, which rose to 126 basis points yesterday, the highest level since 1997.
### Australia
Following yesterday’s Reserve Bank of Australia meeting, the market is more confident of a rate cut at its next meeting in February. The probability of a rate cut rose to 66%, double the likelihood at the end of last month. The swaps market anticipates between 75 and 100 basis points of cuts next year. The Australian dollar has struggled to recover since the central bank’s dovish stance on Tuesday, recording session lows near $0.6365 in North America and further declining today to a new yearly low around $0.6335.
### Mexico
Yesterday, the Mexican peso strengthened, positioning it as one of the best-performing emerging market currencies, buoyed by softer-than-expected inflation results, which increased confidence that Banxico would cut rates next week. Currently, the dollar is trading firmer above MXN20.23 in Europe. In the broader Latin American region, the Brazilian real led the gains yesterday, appreciating by 0.55%.
