French government on precipice, presses Euro lower

Overview: The US dollar is beginning the new week and month on a firm note. It is rising against all the G10 currencies and nearly all the emerging market currencies. US-President-elect Trump's threat to BRICS if they abandon the dollar is symbolic than substantive, as we have argued, despite the occasional claim to the contrary, a BRICS currency is not realistic, and the China has little interest in fostering another competitor to the yuan. Still, like being told by Mexico's President Sheinbaum that migration through the southern US border has fallen sharply and fentanyl deaths have been trending lower for many months, Trump is able to claim a victory. Meanwhile, the French government appears on the verge of collapsing, and an election cannot be called for nearly a year. The German government faces a confidence vote later this month and it is unlikely to survive it. Elections are planned for the middle of Q1 25. The euro briefly traded below $1.05 and additional near-term losses look likely. 

Nearly all the Asia Pacific equities rallied today, led by Taiwan's 2.1% rally. South Korea and Indonesia were notable exceptions. Europe's Stoxx 600 is up 0.25%, which if sustained would be the third consecutive advance. US index futures are nursing minor losses. European benchmark 10-year yield are mostly 1-3 bp lower. The French bond is an exception, and the yield is slightly firmer on the day. The US 10-year yield is up nearly five basis points to almost 4.22%. Rising rates and a firmer today are weighing on gold today. It fell around 2.7% last week, its fourth weekly decline in the past five weeks. But it is snapping a four-day advance today and is off around 0.3%. January WTI is hovering at the lower end of last week's range $68-$69 a barrel in quiet turnover. 

Asia Pacific

China reported small gains in its November PMI over the weekend. The composite stalled at 50.8 after two months of improvement. The rise in the manufacturing (50.3 vs 50.1) was offset by the slippage in the non-manufacturing PMI (50.0 vs. 50.2). The Caixin manufacturing PMI was reported earlier today, and it tells a bit better of a story than the official PMI. The Caixin manufacturing sector PMI rose to 51.5 from 50.3, its best level since June. New orders rose at their quickest pace since February, and output price inflation at a 13-month high. The markets are still pricing in the likelihood that additional monetary support will be forthcoming, with a cut in required reserves possible before the end of the year. Separately, note that as of December 1, China is imposing export restrictions on several critical metals and minerals with dual use (military and civilian). Talk of a Mar-a-Lago accord is at least five years old  (see here), where there would be an international agreement to drive the dollar down in exchange for a reduction of the tariffs Trump threatened on the campaign trail. It has been resurrected recently, but it seems more wishful thinking from some market segments than an exercise in political realism. It is a very American-centric perspective that does not grasp that the Plaza Agreement, which a Mar-a-Lago accord is modeled on, is not universally revered. At the end of last week, Japan reported firm data (November Tokyo CPI, October retail sales and industrial production). The yen rallied on the back greater confidence of the BOJ hike later this month and the softer US yields. Japan reported Q3 capex and corporate profits/sales earlier today. The initial estimate was that the Japanese economy grew by 0.9% in Q3 (annualized rate). The capex data suggests a possible upward revision, while the median forecast in Bloomberg's survey is for growth to accelerate this quarter to 1.5%. The highlight of the week is on Friday with the report on October labor earnings and household spending. For Australia, the highlight is Q3 GDP in the middle of the week and then the October household spending and trade figures on Thursday. Central bank governor Bullock continues to express concern about the elevated core price pressures. The Aussie finished last week near four-day highs.

Softer US rates and prospects of a BOJ hike sent the dollar to JPY150.45 in the middle of last week. It consolidated on Thursday and took another leg lower on Friday after relatively healthy Japanese data. The greenback made a marginal new session low near JPY149.45 in pre-weekend dealings in North American. There are $570 mln of options at JPY150.50 that expire today. Firmer US yields today helped lift the greenback to JPY150.75 in Tokyo but is mostly JPY150.00-JPY150.00 for the last several hours. The dollar finished last week poorly, but we are reluctant to chase it lower give the likelihood of a firm US jobs report at the end of the week and what looks like another tick up in CPI next week. Amid the market drama in response to Trump's tariff threat, the Australian dollar was sold in sympathy. It reached a three-month low near $0.6435 but recovered in the second half of last week and ahead of the weekend, saw a four-day high. Still, it was unable to rise above the 20-day moving average, which held earlier today near $0.6525. It has not closed above the 20-day moving average since November 7, when the Fed delivered a quarter-point cut. Support is seen in the $0.6470-80 area. Pressed by the yen and decline in US rates, the greenback fell to an eight-day low before the weekend against the offshore yuan (~CNH7.2280). However, once the yen stabilized, the dollar recovered and settled slightly below CNH7.25. The dollar has jumped to nearly CNH7.29 today, its highest level since July. The PBOC set the dollar's reference rate at CNY7.1865 (CNY7.1877 last Friday). The average in Bloomberg's survey was CNY7.2363. China's 10-year bond yield is fell below 2.0% today and officials may again press banks to boost support for the real economy rather than buy government bonds. Note that the PBOC bought CNY200 bln of bonds last month. When adjusted for current CPI, the real rate in China and the US are similar. 

Europe

The eurozone final November manufacturing PMI was unchanged from the preliminary (45.2 vs. 49.0 in October). The new news was from the periphery. Italy's manufacturing PMI slid to 44.5 from 46.9. Alongside Germany, Italy is seen a particularly vulnerable to a US heightened tariff regime. On the other hand, Spain manufacturing PMI slower to 53.1 from 54.5. It was at 46.3 in November 2023. Separately, eurozone unemployment was steady in October unemployment at the record low of 6.3%. It was third month at 6.3%. It was a 6.6% last October. Outside of the final services and composite PMI readings, German data will draw attention. The largest eurozone member economy continues to perform poorly. The German economy contracted in 2023, and it has been more than two years since it has strung together two consecutive quarters of growth. Germany contracted in Q2 by 0.3% before growing by 0.1% in Q3. The Bundesbank warns of stagnation in Q4. The November composite PMI fell to 47.3 (48.6 in October) and is the lowest since February. The final reading will be reported December 4. Then there are three real sector data points--October factory orders, industrial production, and trade figures. Lastly, the UK reported its final manufacturing PMI at 48.0 after a 48.6, preliminary estimate, the third consecutive decline. It was at 47.2 in last November. 

The euro alternated between gains and losses last week. It eked out a small gain before the weekend but could not sustain the momentum that carried it to a seven-day high slightly shy of $1.06. It has not closed above $1.06 since November 12. The risk to the French government has taken a toll on the euro, which has been sold to nearly $1.0495 today. in early European turnover. Since the low was set, the euro has held below $1.0520. On Wednesday, there are two large options to note. The first is for 1.1 bln euros at $1.0525 and the other is for 1.7 bln euros at $1.04. Sterling briefly traded above its 20-day moving average (~$1.2735) before the weekend for the first time since November 8. It met a wall of seller who drove it to about $1.2670 in early North American turnover. It spent the waning hours of the week mostly slightly below $1.27. It is trading inside the pre-weekend range today. It found support near $1.2680 and is near $1.2715 in late London morning turnover. Reports that Musk may finance a new Farage effort is consistent with earlier reports that the Trump 2.0 may hold out the possibility of a new special relationship. 

America

The slew of US economic data reported before the Thanksgiving holiday did not have much impact on Q4 GDP projections, but the odds of a quarter-point cut by the Fed next month pushed up to about 66% from less than 50% at the end of the previous week. We suspect that a solid jobs report at the end of this week (~200k rise in nonfarm payrolls) and CPI the following week (a 0.3% m/m rise would lift the y/y rate to 2.7%, a four-month high, will give the market second thoughts. The two-year US yield slipped below 4.15% in the middle of last week, its lowest level since the eve of the election. The 10-year yield fell to 4.17%, the lowest since October 22. The 200-day moving average is near 4.20%, and the yield settled below it for the first time in over a month. Yields are 3-4 bp higher now. Today's US economic data includes the final November manufacturing PMI (flash estimate rose to 48.8 from 48.5), the manufacturing ISM (which has been running below the PMI, stood at 46.5 in October), and October construction spending. Canada reported that after stagnating in September, its economy expanded by 0.3% in September. Still, quarterly growth (at an annualized pace) slowed to 1.1% from 2.1% in Q2 and nearly 1.8% in Q1. The key issue is what the Bank of Canada does when it meets on December 11. The jobs report on December 6 is the last important data point before the central bank meets on December 11. The market is discounting a little more than a 31% that a second half-point cut its delivered, which is slightly higher than a week ago. We lean in the direction--toward a quarter-point cut. Mexico sees the November manufacturing PMI (48.4 in October), the IMEF index, worker remittances, and the central bank's economist survey. Mexico's Sheinbaum became the first foreign official to push back against Trump's tariff talk. Her letter response highlighted the role that US companies have in the bilateral trade, and the efforts and results of tighter border in terms of drugs and people. She also underscored the role of US demand in Mexico's drug wars and fentanyl. She also noted the Mexico's gun problem originates in the US. A phone call between the two leaders the following day led to some warmer comments in social media and a recovery. The dollar posted its lowest close in more than a week ahead of the weekend.

The US dollar traded at a four-day low against the Canadian dollar (~CAD1.3930) ahead of the weekend before it recovered in North American to about CAD1.4045. Softer US rates, firmer equities and lower yields helped the Canadian dollar shrug off the disappointing September GDP (0.1% vs. 0.3% expected). The greenback returned to the CAD1.40 area as European markets were closing for the week. The US dollar is firm in the CAD1.4015-50 area in the European morning and looks poised to move higher in North America. The US dollar fell for the third consecutive session against the Mexican peso ahead of the weekend and found support near MXN20.25. It surrendered in full the gains scored in the wake of Trump's tariff threat that lifted the greenback a little through MXN20.83. It is consolidating today mostly below MXN20.50. Meanwhile, fiscal issues took a toll on the Brazilian real. The dollar reached a record high near BRL6.1155 ahead of the weekend. Gains were pared and the greenback settled below BRL6.00. A gap from last Thursday's high opening is found between about BRL5.9400 and BRL5.9465.