United States
The foreign exchange market continues to exhibit corrective forces amid the recent reactions to US President-elect’s statements regarding tariff threats. Within this context, G10 currencies from the Antipodean region have shown recovery. However, the yen and Swiss franc have lagged, posting minor losses by midday in Europe. The US economic calendar is packed with significant events such as trade data, JOLTS job openings, the ISM services report, and a $39 billion auction of 10-year Treasury notes, drawing considerable market attention.
In particular, the US Dollar Index experienced its most substantial decline since late November, shedding 0.8% of its value. Given this pullback, the dollar’s trajectory suggests positioning adjustments, potentially preempting the upcoming employment report. Predictions for today’s economic releases suggest an increase in the US trade deficit for November, propelled by heightened imports of industrial supplies and capital equipment. Meanwhile, a modest growth in both JOLTS job openings and ISM services PMI is anticipated.
Eurozone
The euro has demonstrated resilience, retracing half of its losses since the last US employment report on December 6 by climbing slightly above $1.0435. This uptick breached the 20-day moving average for the first time since December 18. Analysts are eyeing the next retracement level near $1.0475. Such movements likely reflect strategic positioning ahead of the US jobs report.
In the broader picture, the US-Germany two-year yield gap has narrowed recently, not experiencing a rise since December 20 when it was at 233 basis points. This, alongside newly released inflation figures from Spain and Germany, signals potential disinflationary trends as high base effects from previous energy prices begin phase out. Yet, the European Central Bank appears poised to persevere with rate-focused policies, possibly delivering a 25 basis point rate cut by month’s end.
United Kingdom
Sterling surged yesterday, reaching a four-day high around $1.2550, marking its recovery amid last month’s economic data. The cross surpassed the 38.2% retracement of its losses, touching levels closer to its 20-day moving average. The possibility of short-covering could extend further with a push beyond $1.2610.
The UK’s extracted manufacturing and services output composite continued its decline last month, marking the fourth straight fall which culminates the year at its weakest point since October 2023. Additionally, the December construction PMI has showcased typical variability since mid-last-year, ending December unwinding previous gains at 53.3.
China
Even with a volatile trading day, the yuan’s offshore pair remained within bounds established towards year-end. The People’s Bank of China slightly adjusted the dollar’s fix for the first time in several sessions, with the yuan staying within previous parameters.
Aside from managing the yuan, the PBOC’s recent maneuvers included fostering an offshore market squeeze in Hong Kong. The overnight HIBOR rate skyrocketed to 8.1%, and China, deviating from historical patterns, appears to be channeling its trade surplus away from US Treasuries. Recent reports also indicate a noticeable drop in China’s Treasury holdings, underscoring a shift in Beijing’s financial behavior.
Japan
The dollar fluctuated in and out of its two-week trading range against the yen, closing with little significant change, thus maintaining neutrality on technical standings. Although the currency edged to highs around JPY158.40 within local sessions, it faced resistance and retracted back.
Japan’s latest bond auction outcome exhibited strong demand, evidenced by the highest bid-to-cover ratio since last October, setting the tone for investor sentiment amid broader market dynamics.
Canada
In Canada, political discussion centers around reports of Mark Carney potentially seeking leadership of the Liberal Party, with Prime Minister Trudeau announcing his eventual resignation plans. Economics have also drawn focus; Canada’s currency has oscillated, responding to tariff discussions but recently rebounded against US dollar gains.
Amid this backdrop, Canada will release its November trade balance and the Ivey PMI, which generally haven’t swayed market currents. However, with the Composite December PMI dropping to 49.0, a cautious outlook may dictate reactions in forthcoming surveys.
Australia
The Australian dollar, which ended 2024 near its lows, has since made a moderate rebound beyond $0.6300 but soon encountered selling pressure, reverting to the $0.6235 level. Market participants now await November’s CPI data as its potential uptick from previous months looms.
In financial forecasts, the swap markets are predicting a 70-basis point rate cut by the Reserve Bank of Australia in contrast to the US Federal Reserve’s anticipated 40-basis point cut. The prevailing yield differential continues to tilt against the Australian dollar, despite its recent price corrections.
Mexico
The Mexican peso made strides despite earlier lows at the close of 2023, climbing robustly in the new year as seen yesterday during the dollar’s downturn. Resilience was maintained even amidst trade tariff conjectures, keeping the currency generally within the MXN20.2775-MXN20.3560 range.
On the economic front, Mexico prepares to release its December CPI data, expecting a carry-dynamics impact from the differential in interest rates, with significant rates still favoring peso carry traders. Looking forward, market anticipations have woven in a construction of interest rate cuts for 2025.
