US Dollar and Trade Implications

DXY H1 ChartUSD COT

RBNZ OCR Statement

Australia's Inflation Landscape

The chip makers around the world felt the relief of a rumour suggesting that the sales curb to China could be less severe than previously expected. But the news didn’t necessarily translated in a strong rally. ASML – Europe’s biggest chip equipment maker that predicted a 30% fall to its Chinese revenue next year – closed 0.22% lower yesterday, while Tokyo Electron – which was up by more than 6% yesterday – couldn’t extend gains at today’s session.

With US markets paused for the Thanksgiving break, France was at the heart of the attention yesterday. The political drama, there, only got worst as Michel Barnier gave concessions to Marine Le Pen – who only asked more of them. Barnier dropped plans to increase taxes on electricity, but Le Pen’s party also wants him to drop the plans to reduce drug reimbursement, help small and medium companies compete better and index pensions on inflation starting from January 1st. The demands are nice – and they have the merit to please the French voters who, as everyone else, are dealing with inflation and cost-of-living crisis – but Le Pen’s demands cost money. And the growing French deficit doesn’t allow the French government to spend that money, please or not. The country’s debt-to-GDP stands near 5.5% today, well above the EU’s 3% target. Pushing for spending the money that you don’t have doesn’t always bode well with investors – except if you’re named after the US.

Remember, Liz Truss wanted to offer the Brits significant tax cuts two years ago, and all she got was a mini financial crisis. This is what we sense from the market reaction to Le Pen’s threats that she would vote Barnier’s government down if he doesn’t give Le Pen what she wants. The French 10-year yield eased while CAC 40 was in a better mood. But the political uncertainties in France will certainly keep volatility high across French-denominated assets into the year end.

For the euro, we don’t yet see a major impact of French political shenanigans, but the French touch is not necessarily a positive one. The EURUSD swung between gains and losses yesterday, caught between mixed inflation data from Spain and Germany. Inflation in Spain ticked higher – from 1.8% to 2.4% in November, while price pressures in Germany came in softer-than-expected thanks to softer food prices. This divergence in the bloc’s largest economies left traders uncertain about the European Central Bank’s (ECB) next moves.

Dues this morning, the EZ aggregate inflation data is expected to print an uptick in price pressures. A softer-than-expected read will certainly keep the ECB doves in charge of the market and cap the euro appetite limited into the 1.06 psychological level, while a stronger-than-expected number should encourage the euro bulls to push for a further recovery. But in both cases, the EURUSD will remain in a bearish trend below 1.0672 – the major 38.2% Fibonacci retracement on September to November selloff.

Speaking of inflation, inflation in Tokyo came in stronger than expected in November, industrial production advanced 3%, almost the double of expectations but came in lower than expected, while retail sales grew sensibly softer than expected. But traders focuses on Tokyo inflation that backed the growing expectation that the Bank of Japan (BoJ) would hike rates in the December meeting. As such, the rise of the hawkish BoJ expectations shortly pushed the USDJPY below the 150 mark. I believe that a sustainable move below this level is possible, if the BoJ goes ahead and hikes rates in its December 18-19 meeting.

In energy, there is hesitation about what to do at the current levels. The latest news suggests that OPEC+ will delay its decision time from Sunday to December 5th. It appears that the cartel members need more time to discuss about what to do about their plans to restore production. It is clear that extending production cuts deep into next year is the only option to prevent boosting the supply gut in global markets – and keep the downside in prices limited at a time of easing geopolitical tensions in the Middle East.

Source: ACTIONFOREX

The US Dollar (USD) stays under selling pressure on Friday, with the USD Index dropping to its weakest level in over two weeks below 106.00. The US economic calendar will not feature any high-tier data releases and financial markets in the US will close early. Harmonized Index of Consumer Price (HICP) data from the Eurozone and third-quarter Gross Domestic Product (GDP) data from Canada will be watched closely by investors.

Following the Thanksgiving Day holiday, US stock index futures gain traction early Friday and the benchmark 10-year US Treasury bond yield continues to push lower toward 4.2%, making it difficult for the USD to find demand.

US Dollar PRICE This week

The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the Japanese Yen.

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).

During the Asian trading hours, the data from Japan showed that the Tokyo Consumer Price Index rose by 2.6% on a yearly basis in November, up sharply from the 1.8% increase recorded in October. Other data revealed that the Unemployment Rate edged higher to 2.5% in October from 2.4% and the annual Industrial Production contracted by 2.6%. After posting small gains on Thursday, USD/JPY turned south early Friday and was last seen trading at its lowest level since late October near 150.00, losing about 1% on the day.

Following Thursday's indecisive action, EUR/USD benefits from the renewed USD weakness and rises toward 1.0600 in the European morning on Friday. The data from Germany showed on Thursday that the Consumer Price Index (CPI) declined by 0.2% on a monthly basis in November's flash estimate, matching the market expectation.

GBP/USD gains traction in the European morning and trades in positive territory above 1.2700. The pair remains on track to snap an eight-week losing streak.

Canada's GDP is forecast to expand at an annual rate of 1% in the third quarter after growing 2.1% in the second quarter. Following the upsurge seen earlier in the week, USD/CAD closed the previous two days in negative territory. The pair extends its slide early Friday and trades below 1.4000.

Gold gathers bullish momentum amid retreating US T-bond yields and trades above $2,660 in the European morning on Friday, rising about 1% on the day. 

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

Source: FXSTREET

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six other major currencies, falls below 106.00 during the Asian hours on Friday, with 2-year and 10-year bond yields standing at 4.21% and 4.23%, respectively, at the time of writing.

The US Dollar faces downward pressure as US Treasury yields decline, driven by rising bond prices following President-elect Donald Trump’s appointment of Wall Street veteran and fiscal conservative Scott Bessent as the next US Treasury Secretary.

Markets are closely monitoring upcoming US data for further clues about the Federal Reserve's (Fed) monetary policy direction. On Wednesday, US core PCE prices for October met expectations, keeping investor hopes alive for another rate cut in December. However, other data indicated a resilient economy, suggesting that the Fed may take a cautious approach in the coming year.

The latest Federal Open Market Committee's (FOMC) Meeting Minutes for the policy meeting held on November 7, indicated that policymakers are adopting a cautious stance on cutting interest rates, citing easing inflation and a robust labor market.

According to the CME FedWatch Tool, futures traders are now pricing in a 66.5% probability of a 25 basis point rate cut in December, up from 55.9% a week ago. However, they expect the Fed to keep rates unchanged during its January and March meetings.

Source: FXSTREET

SINGAPORE - Singapore hotels’ performance slipped in October, following highs in September when the Formula One (F1) night race came to town, Singapore Tourism Board (STB) data showed on Nov 29. This came even as international visitor arrivals picked up for the month.

October’s average room rate (ARR) dropped sequentially to $275.19, down 12.9 per cent from $315.79 in September. Still, it was up 1.7 per cent year on year.

Revenue per available room (RevPAR) similarly slid 14.4 per cent to $225.07 in October, from $263.06 in September. Year on year, it grew 6.7 per cent.

As a whole, room revenue in October also fell, down 13.3 per cent month on the month to $442.7 million, from $510.8 million in the previous month. Year on year, it was up 8.8 per cent.

September’s ARR, RevPAR and overall room revenue remained the highest in the year to date.

Average occupancy rate also registered a slight decrease on the month to 81.8 per cent in October, from 83.3 per cent in September. But on a yearly basis, it was 3.8 percentage points higher.

Historically, hotel performance indicators also marked month-on-month slips in October 2023 and pre-Covid October 2019.

The latest downtrends came even as tourist arrivals charted month-on-month growth of 3.5 per cent in October to 1.31 million, from 1.27 million before. Arrivals were up 16.7 per cent year on the year.

Rates also declined across hotel categories month on month. ARR fell to $653.54 (from $757.13) in the luxury segment, $318 (from $374.84) in the upscale segment, $210.96 (from $238.05) in the mid-tier segment, and $142.84 (from $158.13) in the economy segment.

In the year to date, Singapore’s ARR was up 2.3 per cent year on year to $281.42. Overall room revenue grew 12.5 per cent to $4.5 billion. RevPAR increased 3.1 per cent to $231.89, and the average occupancy rate climbed to 82.4 per cent, from 81.8 per cent in the corresponding period in 2023.

Geographical breakdown

China continued to be the top source of international visitors in October with 234,526 arrivals, up from 217,178 in September.

Also increasing was the number of visitors from Indonesia – the second-largest source of tourists – at 183,711, from 173,551 before.

Malaysia – still in third place – was the source of 103,432 tourists in October, though this slipped form 112,110 in the preceding month.

There were 102,224 tourists from India, climbing to fourth place in the list of visitors, up from 87,713 in the month before.

In October, 100,935 visitors hailed from Australia, a slight decrease from 110,868 in September.

In the first 10 months of the year, Singapore welcomed 13.9 million international visitors. STB chief executive Melissa Ow said at this year’s Tourism Industry Conference that the agency expects 15 million to 16.5 million tourist arrivals for the full year. 

Source: Straitstimes

All industry output dropped -0.3% MoM sa in October for a second month

Manufacturing and mining output stayed flat in October after a 0.1% MoM sa contraction in September. Semiconductors (8.4%) rebounded strongly after a fall of -2.4% in September. However, shipments fell sharply (-16.7%), leading to a slight rise in inventories. Overall inventory levels are now quite low, so we don't think this will lead to production cuts in the near future. Meanwhile, the contraction of car production deepened in October, falling -6.4% in October after a 0.75% fall in September. But with rising inventories, this adds some concerns about weak auto production in the coming months. 

Services activity rebounded 0.3% in October but did not fully offset the 0.8% decline in September.  Financials (3.1%) and welfare/social services (1.8%) increased while whole/retail sales, which are more closely related to consumption, dropped -1.4%. Production fell in both the construction (-4.0%) and the public administration (-3.8%) sectors in October. For construction, this was the sixth consecutive monthly decline, indicating that the restructuring of the construction sector has continued throughout 2024.  

Overall production activity has been on the weak side throughout 2024

Source: CEIC

Retail sales dropped for a second month

Retail sales fell 0.4% MoM sa in October (vs -0.5% in September). Durable goods sales were particularly weak (-5.8%) with automobile (-3.4%), household appliances (-9.4%), and telecom equipment (-10.0%) declining. However, semidurable goods and nondurable goods rose 4.2% and 0.6%. We believe that big sales promotions such as "Sale Festa November" are likely to boost retail sales in November, at least temporarily. We will also see how the BoK's rate cuts have supported consumption activity in a couple of months. 

Retail sales declined for a second month

Source: CEIC

Investment is a key drag

Manufacturing production and retail sales were weak, but we believe that weak investment is the key drag on the economy. As mentioned earlier, ongoing restructuring in the construction sector hasn't shown a sign of recovery yet even after the sixth monthly decline. Construction orders have rebounded but it will take time for overall construction to recover.

Meanwhile, equipment investment dropped -5.8% in October. General machinery investment dropped but electrical & electronic equipment rose again. We believe IT equipment investment is likely to stay on the rise, but other investment is likely to decline. Furthermore, machinery orders have now dropped for three months in a row, signalling weak growth in the coming quarters. 

Construction hasn't bottomed out yet

Source: CEIC, ING estimates

GDP and BoK outlook

A weak start to the quarter tends to weigh more heavily on quarterly results. Thus, today's weaker-than-expected IP suggests a cloudy outlook for 4Q24 GDP. We expect 4Q24 GDP growth to reaccelerate to 0.6% QoQ sa from 0.1% in 3Q24. An improved net export contribution should be the main reason for the recovery. We believe exports will rebound in 4Q24 while imports will decline, leading to a wider trade surplus, and supporting GDP.  November exports results will be released on Sunday, and we expect moderate growth of 4.4% YoY.

We will also carefully watch to see how the recent 50bp of policy rate cuts by the Bank of Korea boost domestic demand.  As we noted in our note about the BoK policy review, we believe that the BoK will continue its rate cuts throughout next year. We expect another 25bp cut in February.