Yen jumps on rate hike speculation

Overview: The US dollar has a softer profile today. All the G10 currencies are higher, led by 1%+ surge in the yen amid heightened speculation of a rate hike next month, while the US 10-year yield is near 4.25% today, the lowest since the election. Although the Reserve Bank of New Zealand allows for another half-point cut after delivering the second one this year earlier today, the New Zealand dollar has popped up amid sell the rumor buy the fact type of activity. The euro and sterling are firm but holding below yesterday's highs. Emerging market currencies are mostly firmer today, but the Mexican peso continues to underperform. It is off about 0.25% and only the Russian ruble has lost more (~-3.2%). 

The large equity markets in Asia Pacific were mixed. China, India, Australia, and New Zealand rose. Japan, Taiwan, and South Korea fell. The Stoxx 600 in Europe is lower for the second session, and US index futures are trading softer. Benchmark 10-year yields are slower. In Europe, you are looking at a 3-5 bp decline, with UK Gilts setting the pace. The 10-year US Treasury yield is off nearly five basis points as is the two-year yield. Lower rates and softer dollar are conducive for gold. The yellow metal is extending yesterday's recovery off $2600. It is straddling the $2650 area in Europe. A ceasefire between Israel and Hezbollah has not had much impact on January WTI. It is little changed on the day, slightly below $69. It settled last week closer to $70. 

Asia Pacific

The yen's surge is not the result of Japan's economic data. The calendar was quiet today, and the weekly MOF portfolio flows tomorrow. Speculation is mounting that the BOJ will hike rates next month and Friday is the big day. All else being equal, the data should encourage speculation that the BOJ can hike rates next month. Tokyo's CPI will likely signal an increase in the national reading, which not be released for several weeks. Industrial production is expected to have jumped by 4% after rising 1.6% in September. Rising exports and a recovery in the scandal-ailed auto sector likely helped. Retail sales likely stabilized after plummeting by 2.2% in September. The swaps market has nearly 17 bp of tightening discounted for next month's BOJ meeting. Australia reported its October monthly CPI was flat at from 2.1%, a little softer than expected, but underlying trimmed mean measure rose to 3.5% from 3.2%. While the Reserve Bank of New Zealand delivered the 50 bp cut as widely expected, the RBA will stand pat (December 10). It is not seen easing until Q2 25. The RBNZ kept the door open to another 50 bp cut when it meets again in February, if the economy evolves as officials expect, which includes a contraction in Q3. China reports its PMI Saturday. A small increase is expected. 

Despite a firmer US 10-year yield, the found little traction against the yen and recorded a new two-week low near JPY153.00 yesterday, where options for nearly $2.6 bln expire today. Softer US yields and speculation of a BOJ hike has sent the dollar to nearly JPY151.35 today. This effectively unwinds the greenback's gain since election. The 200-day moving average is near JPY152, which the dollar has not settled below in over a month. The JPY150.20 area corresponds to the (38.2%) retracement of the dollar's rally from the mid-September low (~JPY139.60). After it was sold from a little over $0.6500 to $0.6435 as part of the larger currency sell-off following Trump's tariff comments on Monday, the Aussie recovered and returned to the session high, slightly above $0.6500 in the North American morning. It met determined sellers who took it back to about $0.6450, around where it consolidated. Still, the price action was poor, and the Aussie posted its lowest settlement since April (~$0.6450). However, it has come back bid today and is knocking on the $0.6500 area. For its part, the New Zealand dollar is rivaling the yen as strongest G10 currency, rising around 1%. The greenback peaked slightly above CNH7.2725 in the Asia Pacific session yesterday as the market responded to Trump's tariff threat. It trended lower and reached nearly CNH7.2525 in the North American morning. The greenback recovered and reached almost CNH7.27 today. The PBOC continues to protest the yuan's weakness/dollar strength by setting the greenback's reference rate with little bearing to expectations and little changed from the previous session. The fix was set at CNY17.1982 (CNY7.1918 yesterday). The average in the Bloomberg survey was CNY7.2540. Since November 12, the dollar's reference rate has been set between CNY7.1907 and CNH7.1992.

Europe

Tomorrow's eurozone's money supply nor the EC and ECB surveys will provide new trading incentives. However, Friday's preliminary estimate of November CPI is a different story. A rise in the headline rate (2.3% vs. 2.0%) and tick up in the core rate (2.8% vs. 2.7%) may discourage speculation that of a 50 bp rate cut when the ECB meets on December 12. The dismal flash PMI saw the odds jump in favor of the larger move, but as cooler heads prevail, the probability embedded in the pricing of the swaps market eased to about a 1-in-3 chance from nearly a 50/50 proposition before last weekend. The UK has a light economic calendar in the coming days. The main feature is consumer credit and mortgage lending figures. The market has all but given up hope of a Bank of England rate cut next month. The swaps market has a February cut nearly fully discounted (90%). While 50 bp of cuts is discounted for H1 25, the market does not quite have another cut discounted for Q3 25.

Yesterday, the euro traded on both sides of Monday's range (~$1.0430-$1.0530) but the close was well-within the range, leaving a more neutral technical tone. Still, the settlement was weak. Near $1.0460, it was the second lowest of the year. It is firm today but holding slightly below yesterday's $1.0545 high. Some of the buying today may be related to the 3.3 bln euro of options at $1.05 that expire today (and another 1.5 bln euros expire there on Friday). The $1.06 area must be overcome to lift the technical tone. Sterling posted an outside down day, trading on both sides of Monday's range (~$1.2640-$1.2615) and settled neutrally. It held above the low reached on the poor flash PMI last Friday, near $1.2485. It is firm today, flirting with this week's high s around $1.2615. Initial support may be in the $1.2570 area. 

America

Given tomorrow's holiday, the US is releasing a ton of data today. The revisions to Q2 GDP are the least of it. October goods trade, durable goods orders, and personal consumption expenditures will investors and economists get a handle on the economic momentum at the start of Q4. Growth is expected to moderate this quarter to 2.0%-2.5% from 2.8% in Q3 and 3.0% in Q2. The 0.4% rise in consumption is solid even if a tick lower than September's 0.5% gain. Of course, the deflators will draw much interest but 1) due to the prior release of CPI and PPI, there is typically little surprise and 2) we already know that both the headline and core rates accelerated slightly. Recall that the base effect, which Fed Chair Powell discussed at the conclusion of the last FOMC meeting, will likely translate into a bounce here in Q4 (Q4 23, the PCE deflator rose at an annualized rate of less than 1% but then accelerated at a 4.4% annualized rate in Q1 24, which will make for an easier comparison next year). Next week's monthly employment report likely minimizes the impact of weekly jobless claims. Early forecasts for job growth this month is around 200k, a bit above this year's average. That coupled with the firmer inflation reading may see the market further pare the odds of a Fed cut next month. For its part, Canada reports September and Q3 GDP ahead of the weekend. Firmer growth, following the uptick in CPI, could give the market second thoughts about the likelihood that the Bank of Canada delivers its second 50 bp cut (December 11). The odds have been slimmed to about 25% from over 40% last Monday. Mexico reports October trade figures today, and later, the Banxico's inflation report. Tomorrow, the minutes from the recent central bank meeting will be published. The next central bank meeting is December 19 and market leans toward another quarter point cut. 

Trump's tariff threat sent the US dollar to nearly CAD1.4180, its highest level since April 2020. The pandemic high was almost CAD1.4670. Yesterday was the third consecutive gain in the US dollar, but, after the peak in the Asia Pacific session, the greenback trended lower and reached nearly CAD1.4050. The next area of support is seen around CAD1.4000-20. The US dollar is consolidating quietly today between roughly CAD1.4035 and CAD1.4080. Ironically, Canadian officials had brought much of its trade policy vis a vis China into alignment with the US and had been critical of Mexico for not doing likewise. However, even if meant as an opening negotiating tactic, Trump's tariff threat suggests some equivalence between Canada and Mexico (though Trump negotiated USMCA and called it the best trade deal ever). For the record, and contrary to how it was promoted, the US bilateral trade shortfall with Canada and Mexico has widened since 2019. Trump's tariff threat sent the greenback a new high since August 2022 near MXN20.8315. It was set early in the North American afternoon. Previously, the high was set the day after the US election near MXN20.8070. The dollar is firm near MXN20.71 in late European morning turnover. It has spent little time so far today below yesterday's settlement (~MXN20.65). Among emerging market currencies, the peso's loss of 1.8% led the way lower. Only three emerging market currencies eked out small gains against the US dollar (Peruvian sol, South Korean won, and Brazil real). Most emerging market currencies are firmer today but not the peso. It is off about 0.3%, making it the worst EM performer after the Russian ruble (~-3.2%).