Weekly Currency Market Review and Outlook

US Dollar Performance and Market Sentiment

Last week, the US dollar experienced notable weakness, declining against all G10 currencies except the Swiss franc. The franc’s close ties to funding currency activities, usually attributed to the yen, appeared less influential, leading to its relative resilience. Japanese authorities expressed concern over the accelerated depreciation of the yen, while Swiss officials appeared comfortable with the franc’s retreat not only against the dollar but also versus the euro.

Meanwhile, emerging market currencies such as the Mexican peso and Chinese yuan achieved new highs for the year. The upcoming week’s focus centers on the Federal Reserve’s scheduled meeting, alongside three other G10 central banks—the Reserve Bank of Australia, the Swiss National Bank, and the Bank of Canada—all expected to maintain their current monetary policies. The market firmly anticipates a Federal Reserve rate cut in the coming week. Leading into the September and October rate reductions, the dollar was generally sold off but rallied subsequently upon the cut announcements.

Interest Rate Spreads and Dollar Dynamics

Market expectations reverting to a near-term Fed rate reduction have weighed on the dollar. Three key interest rate differentials have drawn attention:

– The US-Germany two-year yield premium contracted to below 145 basis points, its lowest since September 2024, down from a peak near 225 basis points in February.
– The US-Japan 10-year yield premium hit a 3.5-year low of approximately 215 basis points, having reached just over 350 basis points in January.
– The US-China 10-year yield spread, which stood near a record 315 basis points early in the year, has narrowed by nearly 100 basis points.

These spreads do not perfectly predict dollar movements but highlight that wider interest rate premiums have supported dollar strength amid policy uncertainties linked to Washington.

Key Data and Forecasts

Prior to the Federal Open Market Committee (FOMC) meeting on December 10, September’s Job Openings and Labor Turnover Survey (JOLTS) and the Q3 Employment Cost Index are scheduled for release. Alongside the policy decision, the Federal Reserve will issue updated economic projections. The September median forecast anticipated two rate cuts during 2026, expecting 1.8% GDP growth, 2.6% headline and core Personal Consumption Expenditures (PCE) inflation, and a 4.4% unemployment rate. Derivatives markets currently price in two cuts in 2026 and a roughly 60% probability of a third, factoring in the expected appointment of a new Fed chairman.

Dollar Index Technicals

The Dollar Index extended its decline for eight straight sessions through midweek before stabilizing. Market participants recognize the established pattern of dollar weakness preceding rate cuts and subsequent rebounds. The index found support near the 38.2% Fibonacci retracement of its rally from the September 17 low, potentially triggering short covering. Initial resistance is emerging around 99.20, with more substantial technical barriers between 99.40 and 99.60.

Eurozone and Euro Developments

Market and Correlation Analysis

The euro remains the primary substantial alternative to the dollar. The 30-day inverse correlation between the euro and changes in US two- and ten-year Treasury yields (and their spreads with German bunds) stands at roughly -0.40. Additionally, correlations with major European equities (S&P 500, DAX, Stoxx 600) are modestly positive.

Economic Data and Trade

Aside from the Sentix Business Climate survey, the spotlight is on Germany’s economic indicators. October factory orders surpassed expectations, complementing Monday’s industrial production figures and Tuesday’s trade data. German industrial output is poised to post consecutive monthly increases for the first time since early 2024. September exports rose by 1.4%, the most in 2024, maintaining an average monthly growth rate consistent with the prior year. Imports advanced at a faster pace than last year, while the current account surplus is expected to decrease from approximately 5.7% to 5.0% of GDP in 2024. The Bundesbank’s forecast of a stable surplus at 5.7% appears optimistic, contrasting with the OECD’s more conservative projections of 4.8% for 2024 and 3.7% in 2026.

Euro Price Behavior

After an eight-day rally, the euro’s advance was interrupted last Thursday, briefly surpassing $1.1680 (a near two-month high) but failing to break above the 50% retracement of losses from the September 17 high. The currency consolidated above $1.1635 ahead of the weekend. While some price consolidation is expected ahead of the Fed announcement, a decisive break below $1.1580-$1.1600 could be viewed as unfavorable.

People’s Republic of China (PRC) Currency and Economic Data

Yuan Valuation and Policy Signals

By gradually lowering the US dollar’s daily reference rate, the People’s Bank of China (PBOC) signals controlled appreciation of the yuan. Although appreciation is proceeding more cautiously than some external observers expect, it is steady. Market consensus suggests that the yuan may gradually approach the 7.0 level versus the dollar. Over the past 30 trading sessions, the correlation between the dollar offshore yuan exchange rate and the Dollar Index has risen from about 0.40 to 0.70.

Reserves and Inflationary Trends

November’s foreign reserves data will be released shortly, reflecting consistent monthly increases throughout 2024, excluding July. Year-to-date, reserves have grown approximately $141 billion through October; however, they declined nearly $36 billion in total during 2024. Reserve fluctuations depend both on asset holdings and valuation changes, with gold prices playing a significant role given PBOC’s ongoing accumulation. Gold prices have surged over 60% this year, including a 25% increase in November alone.

Inflation data reveal moderating deflationary pressures: producer price deflation has eased to -2.1% year-over-year in October after reaching lows of -3.6% in mid-2024. Consumer prices turned positive in October at a 0.2% yoy increase, reversing previous declines in August and September. Consensus forecasts for November average a 0.7% increase, which would be the largest rise since February 2023. Core CPI stood at 1.2% in October, last negative in early 2024.

Yuan Price Dynamics

The US dollar reached a yearly low around CNH7.0540 midweek before consolidating at roughly CNH7.0720. The dollar’s recent decline from approximately CNH7.1040 to 7.0540 took about ten trading days, with time remaining for the yuan to test the 7.0 level before year-end. The PBOC’s daily fixing will remain a critical directional indicator. Weekly reference rates have generally declined since Q3’s end, aside from a brief rise in late November.

Japan: Yen and Economic Indicators

Exchange Rate Correlations

The USD/JPY exchange rate retains sensitivity to overall dollar trends, but its 30-day rolling correlation with the Dollar Index has declined to near 0.60, the lowest in seven months. More recently, the exchange rate correlates higher with changes in the US two-year yield (~0.40) than with the 10-year yield (~0.30). Unusually, rising long-term Japanese yields have corresponded to yen weakness, with a recent positive correlation between exchange rates and Japan’s 40-year yield—reaching near 0.50 in mid-November. This suggests higher domestic yields have coincided with dollar gains versus the yen, albeit the correlation has eased to below 0.25.

Monetary Policy and Economic Growth

The Bank of Japan (BOJ) meeting is scheduled for December 19. Probability of a rate hike has intensified, rising to approximately 90%, up from below 60% in late November. Despite the BOJ’s long-standing emphasis on wage growth, the recent union proposal for a minimum 5% pay increase may not materially impact markets. Q3 GDP data underscore economic challenges: the world’s third-largest economy contracted at an annualized rate of 1.8%, with net exports detracting 0.2% from growth. Nonetheless, October’s initial industrial production estimate of a 1.4% increase suggests stabilization into Q4, pending revisions.

Yen Price Movements

The US dollar peaked near JPY157.90 on November 20 but declined to JPY154.35 before weekend trading. Although slight recovery occurred, the pronounced rally since the September Fed rate cut appears to have concluded. Technical indicators reveal the five-day moving average crossing under the 20-day average—for the first time since early October—while the dollar struggled below its 20-day moving average for three consecutive sessions. Resistance is anticipated around JPY155.60-70 and more substantially near JPY156.50.

United Kingdom: Sterling and Economic Metrics

Correlation Trends and Policy Environment

Sterling’s sensitivity to dollar movements has lessened slightly, with the 30-day inverse correlation against the Dollar Index moderating from an 18-month extreme near -0.90 in early October to about -0.80, still significantly negative. Inverse correlations with the 10-year UK gilt yield and the US two-year Treasury yield have contracted even more sharply, reversing from multi-year extremes towards -0.25 and -0.35, respectively. The UK government’s recent announcement of a tighter fiscal stance, combined with anticipated Bank of England (BOE) monetary easing, creates a policy mix generally supportive of a stronger currency.

Data and Growth Outlook

Two key data releases warrant attention: house prices early in the week and the detailed GDP report at week’s end. While Rightmove data show three consecutive months of year-over-year house price declines through November, Nationwide’s recent figures indicate a 1.8% annual increase—the slowest since mid-2024. GDP monthly aggregates suggest modest growth, with consensus forecasts pointing to a 0.2% expansion for Q4 2024.

Sterling Price Action

Sterling attained $1.3385 on December 4, its highest since late October, approaching the 50% Fibonacci retracement of losses since the September 17 high around $1.3725. The currency consolidated above $1.3320 heading into the weekend, displaying constructive price behavior. A break above $1.3400 could trigger an additional rapid gain of approximately half a cent. Momentum indicators appear stretched; a move below $1.3280-$1.3300 may signal the onset of a correction.

Canada: CAD Trends and Economic Indicators

Exchange Rate and Yield Correlations

The US dollar’s movement against the Canadian dollar has exhibited reduced correlation with the broader Dollar Index, dropping from a peak of approximately 0.80 in late August to about 0.35 recently. Historically, since late May, the US dollar tracked changes in US two-year yields when moving against the CAD but this relationship inverted starting early November. The dollar-CAD exchange rate also shows a negative correlation with S&P 500 trends (~-0.35). Similarly, its correlation with changes in Canada’s two-year yield, which hit a high near 0.50 in early October, turned negative around -0.45 over the past month.

Monetary Policy and Trade Data

The Bank of Canada’s meeting on December 10 is expected to maintain the current policy stance, with markets pricing in a potential hike only in late 2026. Canada’s merchandise trade figures, delayed due to the US government shutdown, will be published on December 11. The US economic slowdown has impacted Canada’s trade and GDP growth; the merchandise deficit ballooned to approximately C$29.2 billion during the first eight months of 2024 from about C$5.2 billion over the same period last year.

Price Movements

The Canadian dollar gained roughly 0.7% against the US dollar ahead of the weekend, buoyed by a sharp unemployment rate decline (though partially explained by reduced labor force participation). The US dollar approached CAD1.3850, just above the 50% retracement of its rally since mid-June’s low near CAD1.3540. The retracement zone extends to CAD1.3840 with the 61.8% retracement near CAD1.3770. Nonetheless, rapid price moves have pushed the USD slightly below the lower Bollinger Band around CAD1.3900, warranting caution.

Australia: AUD Market Developments and Data

Correlation Analysis

The Australian dollar’s inverse correlation with the Dollar Index reached a high near -0.85 in August. In November, this correlation briefly turned positive for the first time since early 2020 but reverted to roughly -0.40 by late November. Correlations between the AUD and US two-year Treasury yields have fluctuated, hitting highs above 0.50 in mid-November before tempering near 0.20. The AUD’s correlation with the CRB commodity index has also experienced several phases in 2024, alternating between positive and negative relationships, currently settling around 0.32.

Monetary Policy and Labor Market Data

The Reserve Bank of Australia’s December 9 meeting is unlikely to bring policy changes. Derivative markets have begun pricing in a potential rate hike around the end of next year, with futures suggesting about a 40% chance by that time. Australia will also release November employment data on December 11. Year-to-date through October, net employment rose by approximately 160,000, with most gains in full-time jobs. The unemployment rate has hovered near 4.3% in recent months, with a stable participation rate of about 67%.

Currency Price Action

The Australian dollar was the strongest G10 currency last week, appreciating approximately 1.2% against the US dollar and achieving a two-week advance of nearly 2.7%. The AUD neared $0.6650 by week’s end, a level not seen since mid-September. The currency remains slightly below its yearly peak of around $0.6705 recorded on the September 17 Fed decision day. Momentum indicators show stretched conditions, with the AUD closing above its upper Bollinger Band near $0.6625 in two of the last three sessions. Immediate support is seen in the $0.6585-$0.6600 range.

Mexico: Peso Performance and Economic Outlook

Correlation and Carry Considerations

The Mexican peso appeared to decouple from broad US dollar movements in late October and early November, with the 30-day correlation between changes in USD/MXN and the Dollar Index dipping to about 0.10 from highs near 0.80 in late September. This relationship has since strengthened to near 0.40. The peso exhibits sensitivity to global risk sentiment, with an inverse correlation to the S&P 500 around -0.35, down from an October low of approximately -0.75. Correlations between the peso and US two-year yields have been inconsistent, displaying a slightly inverse relationship lately. The peso’s attractive carry and modest volatility continue to support its popularity among traders.

Inflation and Industrial Activity

Ahead of the central bank’s December 18 meeting, November’s CPI is scheduled for release on December 9. October headline inflation stood at 3.57% with core inflation at 4.28%, both above the 3% ±1% target range. Early November CPI data indicate persistent inflationary pressures. At week’s close, Mexico will publish October industrial production figures; industrial output has contracted for four consecutive months through September. The economy posted a 0.3% contraction in Q3, amplifying recession concerns and expectations of further monetary easing.

Peso Price Levels

The US dollar depreciated to a new yearly low near MXN18.1525 before stabilizing below the previous low of approximately MXN18.20. The dollar’s decline briefly pierced the lower Bollinger Band at MXN18.1930, recovering to settle just above it. Technical analysis highlights MXN18.18 as the 61.8% retracement of the rally from the April 2024 low near MXN16.26. Psychological support is anticipated near MXN18.00, with the next significant chart level near MXN17.60.

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_Disclaimer: This analysis is provided for informational purposes only and does not constitute investment advice._