Too Early for A Move Above 1.10

Forex

Summary:

EUR/USD is eyeing the key 1.10 level, but we suspect that any breaks above that level will prove unsustainable as the rates picture remains broadly supportive for the dollar until the US growth picture turns decisively negative.

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

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

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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."

Source: Reuters

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ING

Commodity

Energy

Energy - Attention remains on OPEC+

The oil market came under further pressure yesterday despite growing reports that Saudi Arabia is pressing the broader OPEC+ group to agree to deeper supply cuts when they meet on Thursday. ICE Brent settled just below US$80/bbl as the market increasingly focuses on a looser oil balance early next year. The extension of additional voluntary cuts from Saudi Arabia should erase most of the surplus expected in 1Q24. However, if OPEC+ want to provide more solid support to the market and ensure that we do not see stocks building early next year, they will need to agree on deeper and broader cuts. The Saudis and OPEC+ have made a habit of surprising markets in recent years when it comes to their meetings. However, with aggressive cuts already in place, it does leave one wondering the degree to which the group could surprise the market with deeper-than-expected cuts.

The latest Commitment of Traders report was released yesterday (delayed due to Thanksgiving last week), and unsurprisingly, given the weakness seen in the market, speculators continued to reduce their net long in ICE Brent over the last reporting week. The managed money net long fell by 15,880 lots to 155,105 lots as of last Tuesday, which is the smallest position since early October. The move was predominantly driven by longs liquidating. Similarly for NYMEX WTI, speculators reduced their net long by 19,751 lots over the last reporting week to 104,545 lots - the smallest position since July. While longs are liquidating as sentiment in the market sours, there is also likely an element of speculators taking risk off the table ahead of the OPEC+ meeting.

European natural gas prices came under further pressure yesterday with TTF settling more than 5.7% lower on the day. The storage situation remains very comfortable at slightly more than 97% full. While storage draws are starting to pick up in pace they still remain at record levels for this time of year. We continue to forecast that European storage will end the 23/24 heating season at somewhere between 45-50% full, which, while lower than last year, is still very comfortable and above average. Reduced volatility in the gas market has also seen ICE reduce initial margins for TTF futures by 13% to EUR13.86/MWh.

Metals – Gold surges to six-month highs

Gold climbed to its highest level since May yesterday amid USD weakness and lower US Treasury yields. The market will be closely watching US data releases this week, including inflation data and Q3 GDP numbers. Meanwhile, gold premiums in Asia, particularly in India and China, have been under pressure as higher prices hamper seasonal demand. Gold dealers in India were heard to be offering discounts of up to US$6/oz (vs. US$3/oz a week earlier) over official domestic prices, while premiums in China fell to US$20-US$40/oz (vs. US$43-US$58/oz a week earlier) over global spot prices last week.

In base metals, aluminium prices have been supported by ongoing production curbs in China's southern Yunnan province. Smelters in the region are reportedly planning to reduce aluminium output again this winter amid declining hydropower supply during the dry season. A total 1.16 mtpa of aluminium smelting capacity is set to be halted and is expected to remain offline until May 2024, when the rainy season usually begins. This will mark the third consecutive year that Yunnan smelters have reduced output during the dry season. Further cuts are possible.

Agriculture – UNICA reports higher cane crush

The latest fortnightly report from UNICA shows that sugar cane crushing in Center-South Brazil increased by 32% year-on-year to 34.8mt over the first half of November. The cumulative sugar cane crush for the season stands at 595.4mt, up 15% YoY. Meanwhile, sugar production rose 31% YoY to 2.2mt over the first half of November with total sugar output up 23% YoY to 39.4mt in the season so far. Around 49.8% of cane was allocated to sugar in the fortnight, higher than the 48.6% allocated to sugar in the same period last year, as higher sugar prices prompted mills to increase production levels. CS Brazil will produce a record amount of sugar in the current 2023/24 season.

The USDA's weekly crop progress report for the week ending 26 November shows that the US corn harvest is largely complete with around 96% of area harvested, slightly above the five-year average of 95%. As for wheat, the data shows that 48% of the winter wheat crop is rated in good to excellent condition, higher than 34% seen at the same stage last year.

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Samantha Luan

Forex

Central Bank

Economic

Yen has a notable bounce in Asian session today, fueled by a Nikkei report suggesting that BoJ is finally near to the end its negative interest rate policy. This policy shift, which could see interest rates rise as early as the first half of next year, hinges on the outcomes of spring labor-management negotiations and consumer spending development. Such a move, if realized, would mark a major shift in monetary policy, being the first interest rate hike in 17 years.

Nikkei report indeed aligns closely with BoJ's existing communication, where a wage-price spiral is considered a prerequisite for any rate hike. While BoJ has not specified a timeline, the timing of spring wage negotiations make the first half of 2024 a plausible period for this policy change.

In a related development, Yomiuri newspaper reported that Japan's top business lobby, Keidanren, plans to discuss the potential negative impacts of Yen's weakness on the economy. This is a notable shift, as Keidanren, comprising major companies in the automotive and electronics sectors, has traditionally favored a weak yen. A reevaluation of this stance could intensify calls for BoJ to end ultra-loose monetary policy, reflecting a changing perspective in Japan's business sector regarding currency valuation and economic impact.

Globally, Dollar is underperforming, extending its near-term sell-off. Euro, continuing to struggle too, has failed to break out from its near-term range against the weak Dollar. Swiss Franc is performing marginally better than Euro, while Sterling appears firmer among European currencies. Interestingly, Australian Dollar is currently the second strongest after Yen, showing resilience despite weak retail sales data, followed by Canadian Loonie and New Zealand Kiwi.

From a technical standpoint, EUR/JPY's break of 162.42 minor support indicates the start of the third leg of the corrective pattern from 164.29. Deeper fall could reach 161.22 support and potentially lower, though strong support is expected around 159.75 resistance-turned-support to complete the correction. However, decisive fall through 159.75 would be a significant indicator of Yen's underlying strength.

Yen Strengthens Amid Speculation of BoJ Policy Shift and Business Sector's Currency Concerns_1

In Asia, at the time of writing, Nikkei is down -0.31%. Hong Kong HSI is down -0.60%. China Shanghai SSE is up 0.10%. Singapore Strait Times is down -0.38%. Japan 10-year JGB yield is down -0.0075 at 0.768. Overnight, DOW fell -0.16%. S&P 500 fell -0.20%. NASDAQ fell -0.07%. 10-year yield fell -0.083 to 4.389.

Australia retail sales down -0.2% mom in Oct, strategic delay for Black Friday

Australia's retail sales turnover in October displayed an unexpected downturn, falling by -0.2% mom, contrary to the anticipated rise of 0.1% mom. This decline follows a period of growth, with 0.9% mom increase in September and 0.2% mom rise in August.

Ben Dorber, head of retail statistics at ABS, noted “Retail turnover fell in October after a short-lived boost in spending in September.” This downturn was seen across all retail categories except food retailing.

Dorber attributed this pause in consumer spending to a strategic delay by consumers, who are likely waiting to capitalize on Black Friday sales events in November. He observed that this has become a recurring pattern in recent years, with Black Friday sales gaining increasing popularity among consumers.

RBA's Bullock: we have to be a little bit careful in this period

In a central bank conference held in Hong Kong, RBA Governor Michele Bullock said that monetary policy is currently restrictive, a necessary stance to moderate demand and anchor inflation expectations.

Bullock highlighted the need to be “a little bit careful,” in this period, aiming to control inflation and bring it back within target range of 2-3%, while also being mindful of not overly burdening the economy or causing a significant rise in unemployment rates.

Bullock also pointed out the emergence of “second-round effects” in areas like wages, observing that businesses are currently able to pass on increased costs to maintain profit margins, a trend reflecting sufficient demand.

At the same panel, BoE Deputy Governor Dave Ramsden stated that monetary policy in UK would likely need to remain “restrictive for an extended period” to effectively bring inflation back to 2% target.

Additionally, Pablo Hernández de Cos, Governor of Bank of Spain, noted that tight monetary policy is necessary in the short term. However, he also mentioned the possibility of easing should inflation slow as forecasted.

Looking ahead

Germany Gfk consumer confidence and Eurozone M3 will be release in European session. Later in the day, US will release house price index and consumer confidence.

USD/JPY Daily Outlook

USD/JPY's break of 148.57 minor support indicates rejection by 55 4H EMA. Intraday bias is back on the downside to extend the decline from 151.9. Next target is 147.14 support. Further break of 61.8% projection of 151.89 to 147.14 from 149.66 at 146.72will pave the way to 100% projection at 149.91, which is close to 145.06 key resistance turned support. For now, risk will stay on the downside as long as 149.66 resistance holds, in case of recovery. Yen Strengthens Amid Speculation of BoJ Policy Shift and Business Sector's Currency Concerns_2

Yen Strengthens Amid Speculation of BoJ Policy Shift and Business Sector's Currency Concerns_2

In the bigger picture, rise from 127.20 (2023 low) is seen as the second leg of the pattern from 151.93 (2022 high). Decisive break of 145.06 resistance turned support will confirm that this second leg has completed, after rejection by 151.93. Deeper fall would be seen through 38.2% retracement of 127.20 to 151.89 at 142.45 to 61.8% retracement at 136.63. Nevertheless, strong bounce from 145.06 will retain medium term bullishness for another test on 151.93 at a later stage. Yen Strengthens Amid Speculation of BoJ Policy Shift and Business Sector's Currency Concerns_3