Forex: Watch for Month-End Dollar selling on portfolio rebalancing + OPEC

Forex

In a bold signal of his forthcoming policies, President-Elect Trump has declared that he will implement a 10% additional tariff on Chinese goods and a staggering 25% on all imports from Mexico and Canada from his first day in office. This move, aimed at tightening measures against illegal immigration and the drug trade, sent ripples through the currency markets. The dollar saw an uptick, while the Mexican Peso and Canadian Dollar took a hit, with the CNH also weakening past the critical 7.25 mark, outlining the immediate financial fallout from this announcement.

Amid this turbulent backdrop, the Japanese yen has emerged as a beacon of stability, attracting a deluge of safe-haven flows. This might initially seem counterintuitive, given the yen's tight correlation with the yuan. Yet, it underscores the currency's allure in times of uncertainty, offering a prime arbitrage opportunity for astute forex traders.

Furthermore, Scott Bessent's nomination as U.S. Treasury Secretary has injected a dose of calm into the US fiscal outlook, soothing the U.S. bond market and taking some of the heat out of the dollar rally. This serene US fiscal climate has bolstered the yen, allowing its status as the go-to safe-haven currency to shine and sending the USD/JPY pair to near three-week lows as traders navigate the choppy waters of the evolving trade war landscape.

Amid substantial safe-haven flows, speculation about a potential Bank of Japan (BoJ) rate hike in December bolsters the yen. Suppose the BoJ maintains its deliberate strategy to bolster the yen upon signs of appreciation, aiming to keep it substantially below the 150 threshold to ease domestic concerns and avoid the wrath of Trump if he goes on a currency manipulator tirade. In that case, a rate hike next month appears increasingly plausible, with inflation hotter than the BoJ target.

Today's session is highlighted by the US October core PCE deflator release, anticipated at 0.3% month-over-month. While the broader market has shifted attention away from US inflation obsession, a persistent high reading could revive doubts about the Federal Reserve's decision to cut rates in December. The one issue that is creeping into my mind is the potential downward dollar pressure from month-end selling. 

While there's not much to admire about the euro, it does appear quite oversold after its 6-7% drop over the past two months. However, be mindful of any potential month-end rebalancing that could prompt dollar sales, adding a layer of complexity to trading strategies in the current environment.

Oil markets

Oil prices showed resilience, balancing on the knife edge amid an always fragile Middle East cease-fire and OPEC decisions. West Texas Intermediate steadied just below $69 a barrel, finding some footing after shedding over 3% in the preceding sessions, buoyed by the potential for enduring peace. Brent crude, meanwhile, lingered around $73.

As OPEC+ gears up for a pivotal meeting this weekend, there's intense anticipation that the consortium will defer a January production increase, opting to extend the current output restraint amidst mounting concerns over a surplus. Despite these maneuvers, oil prices have not yet adjusted to the increasing possibility of geopolitical detente in Eastern Europe or the ambitious plans of the Trump administration to significantly ramp up U.S. production by 3 million barrels per day, which will eventually force OPEC's hand for fear of losing market share.

Range trading at the lower end reflects a market cautiously navigating the ongoing recalibrations of supply and demand, still wary of selling too far in case another geopolitical headline hits the wire.