Last week, the U.S. dollar experienced a decline against all G10 currencies. The dollar-bloc currencies, along with sterling and the Scandis, took the lead in this movement. showing appreciation ranging from approximately 0.55% to 1.40% against U.S. dollar. Prior to the weekend, both the dollar bloc and sterling achieved new monthly highs. While the dollar spent a significant portion of the week consolidating against other currencies, following the extension of its recent losses at the week’s outset, our analysis of the technical landscape suggests that the U.S. dollar’s retreat seems to be reaching its concluding phase. Retracement targets have been reached and momentum indicators are indicating a stretched condition.
Looking at the upcoming week in terms of high-frequency economic data, several key points stand out. In the U.S., the CPI suggests a potential slow-down in the November PCE deflator, which has remained 3.4% since July. In Eurozone, the preliminary November CPI is expected to dip to 2.7%, a decline from the 10.0% recorded in November 2022., though this may mark a temporary low for the next couple of months. China’s PMI could see some positive momentum following the recent slew of measures introduced to support the economy and property market.
On Wednesday, the FED’s Beige Book is set to be released, but it is unlikely to alter the prevailing perception that the central bank is maintaining a hold. Simultaneously, the Reserve Bank of New Zealand is convening, with expectations that it will keep its policy unchanged. The OPEC meeting, previously postponed, is rescheduled for Thursday, coinciding with the commencement of COP28. Ending the week on December 1, Canada reports its November employment situation and FED Chair Powell speaks in two venues.
The market is seeking confirmation of its two primary expectations:
- a significant slowdown in growth
- a moderation of price pressures
Key reports influencing GDP forecasts include the expected slightly larger deficit in the October trade balance, a substantial jump in retail inventories in Q3, a projected slowdown in personal expenditures (from 0.7% in September to around 0.2%), a median forecast of 0.4% for construction spending matching the September gain, and November auto sales, with a median forecast indicating an unchanged 15.5 million unit SAAR pace. While there is a little doubt that the world’s largest economy is slowing, the key question revolves around the extent of this slowdown. Equally crucial is the ongoing moderation of the price pressures, supported by indications from the CPI, PPI, and imported prices, which suggest easing. This easing is expected to be confirmed by the PCE deflator. a 0.1% month-over-month increase is anticipated to bring the year-over-year rate down to 3.0% from 3.1%, marking the lowest since March 2021 and following four months at 3.4%. The core rate might see a slight increase of 0.2%, allowing the year-over-year rate to slip to 3.5% from 3.7%.
The implied yield of the December 2024 FED funds futures rose by approximately 8.5 basis points last week, and with a current level around 4.59%, the market has pricedin 74 basis points of easing. Previously flirting with the anticipation of four cuts, the DXY rebounded from a lower near 103.15, its lowest since the early September, to around 104.20 where it encountered resistance. Hovering around the middle of the range before the weekend, the 103.45 area represents the retracement level. Momentum indicators appear to be finding a base in over-extended territory, and a move above 104.25 could potentially target 105 area again.
The highlight of the next week is the preliminary estimate of November CPI. Despite the remarkable improvement that has een the year-over-year rate decelerate from 5.3% in August to 2.9% in October, there might be a bit more room for this downward trend. An expected decline in the German and Italian consumer prices in November could potentially bring the aggregate pace down to 2.7%, as per the median projection in Bloomberg’s survey. However there is a risk that headline CPI could rise in the the subsequent months, particularly in December and January. The swaps market indicates an almost 60% probability that the first interest rate cut will be implemented in April 2024. Nonetheless, this timeline could be pushed back to the 2024 Q3.
Two noteworthy events from the previous week include the German Constitutional Court’s ruling against the government’s attempt to repurpose off-budget Covid funds for climate change. This decision created a substantial budgetary gap of around 37 billion euros (~$40 billion) for this year, prompting Finance Minister Linder to reluctantly endorse the debt brake waiver again. This development heightened concerns about increased government debt issuance. Additionally, the anti-immigration and anti-EU Freedom Party secured the most seats in the Dutch election, but with only 35 seats out of 150 and few willing coalition partners, a period of uncertainty is expected. The rise of right-wing sentiments is evident in several European countries, with parties like Le Pen’s in France and the AfD in Germany gaining traction.
Turning to the euro, it encountered resistance just above $1.0960 on November 21, marking the (61.8%) retracement of its losses since the July high (~$1.1275 to ~$1.0475). After a pullback to almost $1.0850, it recovered to $1.0950 before the weekend. Momentum indicators are stretched, and Slow Stochastics have turned lower. The US premium over Germany for two-year money narrowed in the first four sessions last week, settling near the lower end of its nearly two-month range (~185 bp) before steadying. Psychological resistance is anticipated at $1.10. On the downside, a breach of the $1.0850-$1.0875 area could signal the end of the nearly two-month euro advance, possibly indicating a corrective or consolidative phase. However, a more significant correction would likely require breaking the $1.0795-$1.0800 area.
The euro encountered a pause on November 21, just slightly above $1.0960, which represents the (50.0%) retracement of its losses from the July high (~$1.1275 to ~$1.0475). Subsequently, it experienced a pullback, reaching almost $1.0850 before rebounding to $1.0950 leading up to the weekend. Notably, momentum indicators are currently in an overextended state, and the Slow Stochastics have started to trend lower. In terms of the interest rate differential between the US and Germany for two-year money, it narrowed in the initial four sessions last week, settling near the lower end of its nearly two-month range (~185 basis points) before stabilizing before the weekend. There are indications that it may be poised for a recovery. The psychological resistance level at $1.10 poses a notable barrier.
On the downside, a breach of the $1.0850-$1.0875 range would likely indicate the conclusion of the nearly two-month uptrend in the euro, suggesting the onset of a corrective or consolidative phase. However, a more substantial correction would probably necessitate breaking through the $1.0795-$1.0800 area. The coming days will be crucial in determining whether the euro maintains its upward trajectory or undergoes a more pronounced correction.
In the upcoming week, the UK is set to release data on October consumer credit and mortgage lending. Typically, these figures do not have a significant impact on the market, even under optimal conditions. However, since the Autumn statement in the middle of the last week, both UK rates and the value of the sterling have seen an increase. The 10-year Gilt yield has surged by nearly 20 basis points, with the two-year yield experiencing a comparable uptick. On November 20, the swaps market suggested slightly over a 55% chance of a rate cut by the end of May. However, by the close of last week, these probabilities had diminished to almost zero.
Sterling reached $1.2615 before the weekend, marking its highest level since September 5, and it crossover the (50.0%) retracement of the losses observed since the July high ($1.3140). The next retracement level (61.8%) is situated around $1.29213. Notably, the momentum indicators currently appear stretched. Initial support is anticipated at approximately $1.2500, and a breach of last week’s low near $1.2450 could potentially trigger a decline of 3/4 to 1 cent. The dynamics of these indicators, alongside the upcoming economic data, will likely influence the trajectory of UK rates and the sterling in the near term.
In recent weeks, Beijing and the People’s Bank of China (PBOC) have introduced several initiatives aimed at supporting the economy. The hope is that these measures will positively impact sentiment among purchasing managers. Although interest rates have remained unchanged, the PBOC has injected significant liquidity into the system. The central government plans to boost its deficit by CNY1 trillion and is considering the launch of another CNY1 trillion fund to support public housing and urban renewal. Additionally, the PBOC has initiated a facility to alleviate the debt stress faced by some local governments.
President Xi appears to be engaging in a charm offensive, granting Mastercard permission to enter into a local joint venture, considering the purchase of Boeing Max 37 airplanes, placing new soy purchase orders, offering to lend the U.S. a pair of pandas, and expressing a commitment to addressing the fentanyl trade issue, despite previous denials. However, reports indicate that China’s aerial harassment of Taiwan has persisted. The United States’ response seems less clear, with limited gestures noted, such as the easing of export restrictions on one Chinese company.
Over the past two weeks, the yuan has experienced its most significant gains against the greenback since early January, appreciating by approximately 1.9%. Notably, as the dollar weakened, the PBOC consistently set its dollar reference rates at lower levels each session last week, starting at CNY7.1612 and reaching CNY7.1151 ahead of the weekend. The gap between market projections (Bloomberg survey) and the actual fix has also narrowed during this period. Although there is growing discussion about a potential test of the CNY7.00-05 area in the coming weeks, there’s a suspicion that the greenback may first rise toward CNY7.19-CNY7.22. The evolving dynamics of these factors will likely shape the trajectory of the yuan in the near future.
Japan currently employs an extraordinarily accommodative monetary policy and benefits from fiscal support in the form of a 5.5% deficit/GDP this year. The government is in the final stages of approving another supplemental budget. Despite these measures, the economy faces challenges. Over the past four quarters, it has contracted twice, and both private domestic demand and capital expenditures have declined for the past two quarters. This week’s data, particularly October retail sales and industrial production, will provide insights into economic activity as Q4 commences, with modest gains anticipated. Any signs of disappointment or indications that the economy may still be contracting could impact expectations for the Bank of Japan.
Japan’s October employment report is scheduled for December 1. Notably, despite above-target inflation, the Japanese government and the Bank of Japan (BOJ) stand out among the G10 countries as the only ones actively encouraging higher wages. Unemployment rates have mostly ranged between 2.5% and 2.7% in 2022. The set range for this year was established in Q1 at 2.4%-2.8%, with September seeing the rate in the middle of that range.
Looking at the currency market, the dollar seems to have formed a potential double top against the Japanese yen this month, reaching around JPY151.90. The low between the two highs was approximately JPY149.20 (neckline). The measuring objective of this pattern, when rotated around the neckline, points to a target of around JPY146.50. Last week, the dollar approached this target, reaching around JPY147.15, before rebounding to about JPY149.75 where it encountered resistance. Near-term resistance is observed just above JPY150, and the 20-day moving average is slightly higher (~JPY150.25). Momentum indicators are indicating a potential upward turn in the coming days. The evolving dynamics in the Japanese economy and the currency market will likely be closely monitored for their implications on monetary policy expectations.
Despite recent positive news, such as Australia’s employment rising twice as much as forecasted and central bank Governor Bullock adopting a hawkish tone, the market remains unconvinced. Annual wage growth reached a 14-year high in Q3 at 4%. However, the futures market now indicates a slightly over 20% chance of a hike in H1 2024. Just a few weeks earlier on November 14, the market had assigned over a 55% chance of a hike. Employment and wage data were released on November 15-16.
Australia is set to report October CPI on November 29. The inflation rate had slowed from the peak of 8.4% at the end of last year to 4.9% in July. However, it reaccelerated in August and September, reaching 5.6%. Expectations are for it to unwind the September gain and return to 5.2%. Although this would typically be a highlight, Bullock’s emphasis on demand makes the market sensitive to the upcoming retail sales report (November 28), a day before the CPI release. In September, retail sales jumped by 0.9%, significantly exceeding expectations and contributing to anticipation of the rate hike delivered a week later. Retail sales averaged 0.6% in Q3 after a flat Q2 and 0.8% in Q1. A slowdown in both retail sales and CPI could potentially cap the Australian dollar around the $0.6600 area. This zone encompasses last week’s high, the (50%) retracement of losses since the July high (~$0.6900), and the 200-day moving average. Momentum indicators are currently stretched, with initial support expected near $0.6520. The evolving economic indicators will be closely watched for their impact on the Australian dollar.
In an unusual turn of the calendar, Canada is set to release its November employment data on December 1, a week ahead of the United States. October saw a loss of full-time jobs in Canada (3.3k), contributing to a general sense that the labor market is slowing. The unemployment rate has climbed to 5.7% from 5.0% in April, while the participation rate (65.6%) remains unchanged from April. Notably, Canada added 288.1k full-time positions through October, surpassing the 285k in the first ten months of the previous year. The 12-month moving average of the change in the annual wage rate for permanent employees continues to hover around 5%, almost double the 12- and 24-month averages before the onset of the pandemic.
In addition to employment data, Canada will also report Q3 GDP. The median forecast of 0.4% in Bloomberg’s monthly survey might seem a bit optimistic, considering that the monthly GDP estimates were flat in July and August after contracting by 0.2% in June. The market has responded to this economic trajectory, leading to a decline in the two-year yield from nearly 5% in early October to the 200-day moving average last week, which hovered around 4.35%. September retail sales, stronger than expected at 0.6% compared to the median forecast of a flat report, played a role in the recovery of rates and the Canadian dollar. The two-year yield approached 4.50% before the weekend, and the swaps market currently indicates about a 50% chance of a rate cut in April, down from more than 80% around the middle of the month.
The greenback concluded last week by breaking below the trendline drawn off the mid-July low for the year, the late September low, and the November 3 low, situated near CAD1.3655. It reached a new low for the month, slightly below CAD1.3600 before the weekend. A decisive break below this level could potentially trigger a move toward the CAD1.35 area. The evolving economic indicators and the upcoming employment data will likely influence the trajectory of the Canadian dollar in the coming weeks.