Fed Cut Bets Continue to Weigh on Dollar

Economic

Central Bank

Summary:

Dollar extends slide as first 25bps Fed cut seen by June. Fed officials speak ahead of PCE inflation data later this week. Yen gains on reports the BoJ is considering exiting negative rates. Aussie and kiwi stretch rally, RBNZ decision awaited.

Investors fully price in a 25bps Fed cut in June

The US dollar continued trading on the back foot against its major peers on Thursday, losing the most ground against the yen, the aussie, and the kiwi, in that order. It seems that expectations of several cuts by the Fed next year continue to weigh on the greenback, with the weaker-than-expected new home sales data yesterday corroborating investors' view.

According to Fed funds futures, market participants are penciling in around 90bps worth of rate cuts for next year, assigning a 50% chance for the first 25bps reduction to be delivered in May and fully pricing it for June.

Traders are now likely awaiting the core PCE index on Thursday, the Fed's favorite inflation metric, where a further slowdown could increase the probability for a May cut and perhaps push the dollar even lower. However, investors will have the opportunity to listen to several Fed officials before the numbers are out, with Chicago President Goolsbee and Board Governors Waller and Bowman stepping onto the rostrum today.

It will be interesting to see whether they will push back against rate cut expectations, but also whether the market will pay attention to such comments. Recent market moves suggest that investors prefer to focus more on data rather than Fed rhetoric and thus, even if policymakers decide to pour cold water on rate cut expectations, any rebound in the dollar due to their remarks could remain limited and short lived.

Yen extends recovery on Japanese media reports

The yen took the most advantage of the dollar's weakness yesterday, extending its recovery today after Japanese media carried a report expressing confidence that the end of the BoJ's negative interest rate policy is approaching. Raising interest rates at a time when other central banks are expected to start cutting rates could narrow the gap between Japanese government bond (JGB) yields and yields elsewhere, thereby allowing the yen to stage a solid comeback against most of its major peers.

What may have also helped the Japanese currency is separate news that Japan's top business lobby, Keidanren, is planning to hold discussions on the negative impact of the yen's slide on the economy at its December meeting. In the past, the lobby has favored a weaker yen as it makes exports more competitive overseas, and thus, the shift to discuss negative implications highlights the severity of the impact of the currency's latest fall on the economy.

Aussie and kiwi also take advantage of dollar slide, RBNZ meets

The aussie was the second winner in line yesterday, as the divergence in policy expectations between the RBA and the Fed is adding fuel to its engines. Today, RBA governor Bullock said that they have to be a “little bit careful” with using interest rates to tame inflation without lifting unemployment, but she added that demand is being propped up by immigration, which has contributed to second round effects of cost rises, and that service inflation is sticky. This allowed investors to continue pricing in around a 60% probability for another quarter-point hike by May.

The kiwi was also among yesterday's top gainers, despite bets of around 40bps worth of rate cuts by the RBNZ next year. The Bank meets tonight, during the Asian session Wednesday, and expectations are for no action. Ergo, the focus is likely to turn to the accompanying statement and the updated macroeconomic projections, on signs about the future path of interest rates.

Although recent data out of New Zealand came in on the soft side, inflation remains well above the RBNZ's 1-3% target range, with inflation expectations suggesting that inflation is not likely to return within that range in the coming year. What's more, New Zealand's governing coalition is likely to be led by the National Party, which promised tax cuts, an inflationary policy, and suggested the adoption of a stricter inflation target by the RBNZ. This means that if the Bank switches to a 2% objective like other major central banks, policy may need to stay restrictive for longer than previously estimated to achieve that target.

Therefore, officials are unlikely to affirm market expectations of rate reductions. They will probably continue to predict that interest rates will finish 2024 at the current 5.5% level, which could prove positive for the kiwi.

Gold rises above $2,010 on dollar dip, oil unfazed by OPEC headlines

Gold continued drifting north, closing the day above the high of October 27 at around $2,010, as sliding yields and a weaker dollar continue to reduce the opportunity cost of holding the non-yielding metal.

Oil prices remained under pressure yesterday, even after news that the OPEC+ alliance is looking at deepening oil production cuts despite earlier disagreement that led to the postponement of their gathering from Sunday to this Thursday. That said, black gold is staging a recovery today.

To stay updated on all economic events of today, please check out our Economic calendar

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Devin

Economic

Poverty has forced most Europeans to skip meals during the past three years, according to a survey conducted by Ipsos on behalf of the charity French Secours Populaire, which advocates for people on low incomes.

The survey of 10,000 Europeans in 10 nations asked whether money worries had worsened or improved during the preceding three years.

More than half said their situation had worsened, with 29 percent saying they were so short of money that a single unexpected expense would plunge them into difficulty.

The results, published on Monday in the charity's European Barometer on Poverty and Precariousness, found 38 percent of Europeans were no longer able to eat three meals a day on a regular basis. And 21 percent of parents had skipped meals so they could feed their children.

The survey quizzed people living in France, Germany, Greece, Italy, Moldova, Poland, Portugal, Romania, Serbia, and the United Kingdom.

The pollsters found the main reason for the poor financial situation in many European households was the fast-rising cost of goods and services, with price inflation having tripling during 2022 and the cost of housing, water, and fuel rising by 18 percent during the course of a year. At the same time wages remained relatively stagnant.

Financial worries

The survey followed other recent worrying assessments of increasing levels of poverty throughout Europe, with Eurostat, the European Union's statistics agency reporting 17 percent of the population of the 27-nation bloc was "at risk of poverty" and that only 15 percent of Europeans had enough money not to have financial worries.

Another survey, conducted by the Joseph Rowntree Foundation in June, found the UK had 5.7 million low-income households that were so lacking in money they had insufficient access to food.

And another survey, by the Equality Trust, found the gulf between rich and poor in the UK was actually being exacerbated by the government, which, it concluded, was spending more money than any other European nation on subsidizing the rich through structural inequality.

Priya Sahni-Nicholas, the co-executive director of the Equality Trust, told The Guardian newspaper the growing chasm between rich and poor was "causing huge damage" to the economy.

As a result, she said: "We have shorter healthy working lives, poorer education systems, more crime, and less happy societies."

The survey released this week for French Secours Populaire found money worries among Europe's population now mean a significant number of people have turned off heaters, avoided treatment for medical problems, and borrowed as a result.

The survey found one person in 12 in Italy is in "absolute poverty "and relies on discounted food and food banks. And the situation was even worse in Greece and Moldova, which had more people at risk from poverty than any other European nation.

Source: ChinaDaily

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ING

Forex

USD: Excessive weakness

The dollar has stayed under pressure at the start of this week as markets remained bullish on Treasuries across the curve on the back of growing dovish Federal Reserve expectations. The Fed Funds future curve currently prices in the first rate cut in June 2024. Yesterday, soft US home sales data helped consolidate the dollar's bearish momentum and now endorses the narrative that higher rates are having a more tangible impact on the economy.

Expect the dollar to remain very sensitive to US data, including today's Conference Board Consumer Confidence index, which is expected to have mildly declined. We'll also take a look at the Richmond Fed manufacturing index today. On the Fed side, there are a number of speakers to monitor: Austan Goolsbee, Christopher Waller, Michelle Bowman and Michael Barr. The central bank will almost surely keep rates on hold in December, but the softening in its hawkish stance in November was due to the tightening of financial conditions – and the recent drop in rates significantly increases the chances of pushbacks against rates cut speculations, which can help the dollar rebound.

Month-end flows may get in the mix and delay a dollar recovery, but we remain of the view that it is too early to chase the dollar bear trend. There is still some resilience in US data into year-end that can prop up the high-yielding dollar.

EUR: PEPP discussions kick off

ECB President Christine Lagarde fuelled expectations that the central bank will reshape its bond reinvestment strategy soon yesterday during her EU Parliament hearing. The current indications by the ECB are that its pandemic emergency purchase programme (PEPP) will be in the reinvestment phase until the end of 2024, but there has been growing pressure inside the Governing Council to accelerate quantitative tightening.

Tighter financial conditions are generally positive for a currency, but this specific discussion around PEPP reinvestment could have unwelcome spillover into the euro area peripheral spreads. The Italian BTP-bund 10-year spread is more than 25bp below the 200bp pain threshold, but 2024 carries risks for Italian bonds as EU fiscal rules are reinstated and the economy slows. We currently identify Italian bond spreads as one key risk for the euro next year, even if it is not our base case that they will sustainably widen to concerning levels.

Today, the eurozone calendar is quiet, but there are few ECB speakers to watch. Lagarde will deliver a pre-recorded message, and Pablo Hernández de Cos, Joachim Nagel and Philip Lane are also scheduled to speak. The impact on the euro of ECB members' remarks has been rather muted and EUR/USD should remain almost solely a function of USD moves and Fed rate expectations. We are not convinced the pair has enough backing on the rates side to trade sustainably above 1.10 and favour instead a correction below 1.0900 in the coming days.

GBP: Bearish momentum in EUR/GBP may not last

We had called for a break below 0.8700 in EUR/GBP as sterling benefitted from the better risk environment more than the euro, and above all, the fiscal support in the UK was a clear-cut GBP-positive. We suspect the pair may be reaching the bottom of its recent downtrend, as risk sentiment may start to soften into key US data and the UK fiscal event's impact on markets wears off.

We expect increasing support for the pair around 0.8650 and at the 0.8640 100-day MA. When it comes to Cable, our view is very similar to that of EUR/USD; the probability of a correction from these levels appears rather high.

The UK calendar is empty today, but we'll hear from the Bank of England's Jonathan Haskel this afternoon. Yesterday, Governor Andrew Bailey pushed back against rate cuts while acknowledging the encouraging news on inflation.

NZD: RBNZ may focus on pushing back against rate cuts

The Reserve Bank of New Zealand (RBNZ) announces monetary policy overnight and will almost certainly keep rates on hold again. Since the October meeting, inflation, employment and wage growth have all slowed more than expected. Still, the Bank has to operate with the most lagging inflation data (only quarterly) in the G10 space and will probably focus on keeping its stance broadly hawkish against rising rate cut speculations.

Markets currently price in a first rate cut in New Zealand around this summer, while current rate projections by the RBNZ (published in August) signal rates will be kept at the 5.50% peak at least until the end of 2024. We think the Bank will try to discourage further rate cut expectations by signalling rates will be held at 5.50% or cut only by 25bp in the whole of 2024.

That can help NZD get some further support, although the very good performance of the Kiwi dollar of late remains almost solely a function of external factors. Domestically, it's worth keeping an eye on the expected change in the RBNZ remit by the newly installed government, which plans to remove the dual mandate to focus on inflation only. In our view, that is a long-term NZD-positive.

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Commodity

Gold prices are extending their bullish rally towards a fresh six-month high of 2,018, holding well above the simple moving averages (SMAs) in the daily timeframe.

Technically, the MACD oscillator is strengthening its bullish structure above its trigger and zero lines; however, the stochastic oscillator is showing overbought conditions as it is holding above the 80 level, so a bearish correction may be a possible scenario for the next few sessions.

If the market continues to the upside, then it may target the 2,050 resistance level ahead of the record high of 2,079.29, achieved on May 4.

On the other hand, if the bears take control, the yellow metal could move towards the 20-day SMA at 1,978 and the 23.6% Fibonacci retracement level of the upward wave from 1,810 to 2,018 at 1,969. Underneath these lines, the 50- and the 200-day SMAs at 1,952 and 1,942, respectively could come in focus before meeting the 38.2% Fibonacci of 1,938.

All in all, gold is looking strongly bullish in the short-term so the worries may rise for a bearish retracement, according to the stochastic oscillator, before heading higher again.

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CMC

Forex

We saw a subdued and negative start to the week for markets in Europe yesterday, following on from a weak Asia session, with some mild profit taking after the exuberance of the last couple of weeks.

US markets also saw a similarly modest subdued start to the week, with most of the day's excitement taking place in the bond market, after a strong 5-year bond auction prompted a sharp fall in US 10-year yields towards last week's lows below 4.4%.

When combined with a weak October new home sales report, as well as a weak Dallas Fed manufacturing survey, it is becoming increasingly apparent that markets believe that we will start to see rate cuts by the middle of next year, despite the attempts of various Fed officials to push back on this idea.

Today it will be the turn of Fed governors Christopher Waller and Michelle Bowman, along with the Chicago Fed President Austan Goolsbee who will be tasked with pushing the “higher for longer” narrative that the central bank will want to maintain.

The US dollar had a broadly negative day, helped in some part by the extension of the ceasefire in Gaza, which in turn also served to weigh further on the oil price ahead of Thursday's OPEC+ meeting.

The unwinding of the US dollar trade appears to be being driven by two factors, firstly the idea that the Fed is done on the hiking front, hence the recent slide in yields, and secondly the reduced risk premium that we've seen over the past 2-weeks as markets become comfortable with the idea that the conflict in Gaza can be contained.

Whether that weakness is maintained will probably depend on how markets perceive this week's core PCE inflation numbers for October, however given the losses seen so far this month, the reaction may well be limited by month end positioning.

Today's US consumer confidence numbers for November could also be instructive given the strength of the consumer spending numbers we've seen over the Thanksgiving weekend.

Expectations are for a modest decline to 101 from 102.6, however these numbers can be highly volatile so there is the prospect of an upside surprise, given the decline in gasoline prices seen over the past few weeks.

It's also worth keeping an eye on the pound given the sharp slowdown we saw in inflation in the recent October numbers. This morning's British Retail Consortium shop price index numbers for November saw headline inflation slow from 5.2% in October to 4.3%, the lowest level since June 2022, with food prices lagging behind at 7.8%.

Recent UK economic data has proved to be slightly more resilient than expected which in turn has helped lift the pound on the basis that it will mean the Bank of England will have to defer cutting rates until later in 2024, despite saying the growth outlook for the UK was the worst he's ever seen in his lifetime. Hyperbole aside this is also the same Bank of England who a year ago were predicting a two-year recession.

Yesterday Bank of England governor Andrew Bailey went to great lengths to reinforce that idea, while later today we will get to hear from Deputy Governor Dave Ramsden as well as external member Jonathan Haskel. At the November meeting Haskel was one of 3 MPC members who voted for a 25bps rate hike so his comments will be especially instructive.

EUR/USD – continues to be capped at the 1.0960 area, with the August peaks at 1.1060/70 the next resistance. We need to hold above the 1.0840 area to signal the prospect of further gains. We also have support at the 200-day SMA at 1.0810.

GBP/USD – having broken above the 1.2450 area and 200-day SMA, as well as breaking above 1.2590, 50% retracement, we could well see a further extension towards the 1.2720 area, which is 61.8% retracement of the 1.3140/1.2035 down move. Upside momentum remains intact while above 1.2450.

EUR/GBP – another lower low yesterday at 0.8657 as we look for a move towards the 0.8620 area. Resistance currently back at the 0.8720 area.

USD/JPY – the last 4 days has seen the US dollar hold below the 50-day SMA at 149.70/80. While this level caps the risk is for a move back to the lows last week at 147.15 A break of 150.20 potentially retargets the main resistance at the 151.95 area.

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Thomas

Central Bank

Economic

A key measure of Japan's trend inflation accelerated to 2.2 per cent in October, data showed on Tuesday, marking a fresh record high in a sign of broadening price pressure that heightens the case for the central bank to dial back its massive monetary stimulus.

The data adds to recent growing signs that prospects of sustained wage increases are prodding firms to hike prices for their services, a trend the central bank sees as a prerequisite for ending ultra-low interest rates.

The 2.2 per cent year-on-year increase in the weighted median inflation rate, which is closely watched as an indicator on whether price rises are broadening, followed a 2.0 per cent gain in September. It was the fastest rise since comparable data became available in 2001, Bank of Japan (BOJ) data showed.

The data will be among the factors the BOJ will scrutinise at its next policy-setting meeting on Dec. 18-19.

The BOJ remains a global dovish outlier, having maintained ultra-loose policy even as major central banks elsewhere raised interest rates aggressively to fight rampant inflation.

While core consumer inflation has exceeded its target for more than a year, the BOJ has pledged to keep super-low interest rates until its 2 per cent inflation target can be achieved on a sustained manner, backed by solid consumption and wage increases.

"We're seeing some positive signs in wages and inflation. But there's high uncertainty on whether this cycle will strengthen," BOJ Governor Kazuo Ueda told parliament on Monday.

There has been other signs that conditions for an exit from current policy are falling in place.

Indications from businesses, unions and economists suggest that labour market tightness and cost pressures that had set the stage for this year's pay hikes - the largest in more than three decades - will persist heading into next year's key spring wage talks.

The weighted median is the inflation rate of items at the middle of the price changes, or around the 50th percentile point of the distribution.

After hovering around zero for the past two decades, it began creeping up last year reflecting a wave of price hikes by companies passing on surging raw material costs.

Unlike the consumer price index (CPI), which is swayed by fuel and energy costs, the weighted median inflation rate is useful to trace how widely prices are rising.

Source: Reuters

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Kevin Du

Cryptocurrency

"Layer 2" cryptocurrencies native to projects built on top of "layer 1" blockchains such as Bitcoin and Ethereum - have found a new lease of life after a year in the doldrums, buoyed by a rising crypto tide.

Anticipation of easing US borrowing costs and a possible US spot bitcoin exchange-traded fund have lifted crypto prices since the summer, with market bitcoin gaining by about half since the end of August.

Tokens associated with layer 2 projects - which typically aim to speed up transactions and cut costs - have a combined market cap of about US$14.3 billion, about a tenth of the total crypto market, according to data from CoinMaketCap.com.

Matic, the largest layer 2 token with a market cap of US$6.90 billion, has jumped 20 per cent to US$0.74 over the past 30 days, according to CoinGecko. It's used on Polygon, a platform that reduces congestion on the Ethereum network.

The next four largest coins - immutable, mantle, arbitrum and optimism - have leapt between 9 per cent and 105 per cent over the past month and trade between US$0.5 to under US$2 apiece.

All five tokens are down between 16 per cent and 86 per cent from their all-time highs hit over the past two years, though.

Ether, the layer 1 token linked to the Ethereum blockchain on which most layer 2 tokens are based, has leapt 13.8 per cent to $2,028.80 in the past month.

Layer 2 tokens, which have proliferated in recent years, can be a risky business. They are small and thinly traded, meaning they can be highly volatile and unpredictable. Picking long-term winners is tough.

"On average, the growth is not sustainable for those tokens ... 100 try and one wins," said Matteo Greco, research analyst at digital asset and fintech investment firm Fineqia International.

"There's always a bit of thin air behind the moves."

Price performance is also patchy.

Matic has fallen about 3 per cent in 2023, while gaming token immutable has more than tripled in price, versus bitcoin's 123 per cent and ether's 69 per cent gains.

Speculative Character

Layer 2 tokens are a gauge of sentiment towards the projects they are linked to, but their extreme volatility also lends them a speculative character. They are often among the last ones to catch a bid when broader crypto market rises and among the first ones to sell off when sentiment is shaken.

While layer 2 tokens are tiny in comparison to big guns like bitcoin, their volatility makes them a favorite among active traders trying to capitalize on market momentum.

"They can be very attractive investments even though they can be very speculative," said Joshua Peck, chief investment officer at hedge fund TrueCode Capital, whose fund invests in matic. "For a token that's down 97 per cent, it doesn't take a lot of capital inflow for it to go three times, four times, five times in price."

"Active trading is the right approach for these tokens because the market is moving so much," Peck added.

The future of layer 2 tokens is unclear.

Some analysts see the projects as vital to increasing the practical uses of blockchains like Ethereum, in areas such as finance to gaming.

Yet the market is crowded. Numerous projects and their tokens were launched as the crypto market boomed in 2020, before sinking during the crypto winter of 2022.

"The space feels 'unserious' right now ... in terms of being able to point to an example of something you'd like to run your business or family's personal finances on," said Alyse Killeen, managing partner at venture capital firm Stillmark.

Many investors agree that only projects with useful practical applications will survive.

"In these macro phases, the use cases are not really so important. The real difference between assets that have decent use cases and assets that don't is (in) the bear market," said Fineqia International's Greco.

"Assets that have good use cases are able to resist the downtrend even though they get hit hard."