USD/JPY Sets Sights On Fresh Gains: Bulls In Control

Titan FX

Economic

Forex

Summary:

USD/JPY started a fresh increase above the 156.00 resistance zone.

Key Highlights

USD/JPY started a fresh increase above the 156.00 resistance zone.

A major bullish trend line is forming with support at 156.80 on the 4-hour chart.

EUR/USD is still consolidating below the 1.0450 resistance zone.

Bitcoin failed to regain traction and declined from $100,000.

USD/JPY Technical Analysis

The US Dollar started a fresh increase above the 155.50 and 156.00 resistance levels. USD/JPY cleared the 157.00 level to move further into a positive zone.

Looking at the 4-hour chart, the pair settled well above the 156.50 level, the 100 simple moving average (red, 4-hour), and the 200 simple moving average (green, 4-hour). The bulls remained in control and might aim for more gains.

On the upside, the pair could face resistance near the 158.20 level. The next major resistance is near the 158.80 level. A close above the 158.80 level could set the tone for another increase.

In the stated case, the pair could rise toward the 160.00 resistance. On the downside, immediate support sits near the 156.80 level. There is also a major bullish trend line forming with support at 156.80 on the same chart.

The next key support sits near the 155.50 level. Any more losses could send the pair toward the 154.80 level. Any more losses might send the pair toward the 154.00 level.

Looking at Bitcoin, the bulls failed to push the price above $100,000 and there was a fresh bearish reaction.

Upcoming Economic Events:

US Wholesale Inventories for Nov 2024 (preliminary) – Forecast +0.2%, versus +0.2% previous.

Source: ACTIONFOREX

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

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

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ACY

Economic

When I was a kid, I used to love watch the TV, and from one cartoon to another, the propaganda always came in saying something on those lines “the inflation rose X% from last month to this month, prices on the supermarket have increased by Y%” but I didn’t had a clue on what this was, and now everything makes sense!

Do you know what is inflation? How can such a small word with only 9 letters have a significant impact on our day-to-day life as well a massive impact on the financial markets? Especially on the forex market!

This may sound very new to you, so let’s start with the basics; inflation, on a simple term is the cost of a good or service that erodes as the years go by, if not the most important one if the most important fundamentals into the economy, where all the central banks pay pivotal attention and they even have targets! Every Central bank has an inflation target that they must keep with, the target makes sure that the economy will be on the right path not to hot and not to cold. Every country has a different target, for example in Australia we have the target between 2-3%.

Understanding Inflation and Its Profound Impact on the Forex Market_1

USA for example have different target at 2% only and not a variable inflation targets between 2-3% like Australia.

Inflation is used as an indicator that reflects changes in buying power and economic stability. This phenomenon influences not only domestic economies but also the global financial markets, including the forex market. Its role in shaping monetary policy, influencing currency valuations, and driving investment strategies makes it an indispensable subject of study for expert traders or even for those who are starting.

Origins and Dynamics of Inflation

What is Inflation?

Inflation is the rate at which the general level of prices for goods and services rises, eroding the purchasing power of money. While moderate inflation is associated with economic growth, excessive inflation or hyperinflation can destabilise economies, because with a higher inflation we will have higher rates therefore the products will be extensive as well if you plan to buy a house on a hyperinflation scenario you would be paying the inflation price + the rates from central bank + the rates from what your bank may give you! This will lead to reduced investments… and an erosion of consumer confidence.

The opposite can happen as well as disinflation scenario where what I just said is completely the opposite, the inflation will so low that the central bank will lower the rates in hopes that the population will spend money into the economy making it hotter and to grow quicker. This will lead to diminished savings as the rates will be lower people like me, and you will not leave the money on the saving account, right? As it will not be paying as before on a higher rates scenario. We spend this money into a gift for ourselves or even something cool for the day-to-day life. But this is not all flowers as can weaken the currency as well make the economy very weak, and if not well controlled by the central bank it can get the country economy into a depression…

Historical Perspectives

The concept of inflation has been central to economic thought since the advent of monetary systems. It traces its roots to the introduction of fiat money, where currency value is not tied to a physical commodity like gold or silver. The establishment of the Bank of England in 1694 marked a pivotal moment in regulating money supply and addressing inflationary pressures. Throughout history, events such as the Great Depression of the 1930s, the stagflation of the 1970s, and the global financial crisis of 2008 and the most recent COVID-19 2021 have highlighted the profound influence of inflation on global economies and financial stability.

An interesting question… have you ever thought about what the first few currencies was we had at society, to all the way where we are now?

Before the invention of currency, societies relied on the barter system, where goods and services were exchanged directly. For example, you have a pig, and I have a cow, you want a cow, and I want a pig, both of us are willing to exchange our goods to each other, therefore we make a barter! You get my cow, and I get your pig. However, this system was inefficient due to the "double coincidence of wants"—the need for both parties to want what the other offered.

To overcome this limitation, early civilisations developed standardised mediums of exchange. These first forms of currency were not coins or paper like we have sophisticate machine printing it all day today but rather they have used commodity money, items with intrinsic value.

Shells: Cowrie shells were used in Africa, Asia, and Oceania for centuries as currency due to their durability and aesthetic value.

Precious Metals: Gold, silver, and copper became widely used due to their durability, divisibility, and inherent value. These metals were often traded by weight before being minted into coins.Interesting enough, we can look at the chart below how the value of gold has been so incredible, as it serves as well for a protection against the inflation! The gold price has rose close to 4000%! (in USD).

Understanding Inflation and Its Profound Impact on the Forex Market_2

The First Coined Currency

The first officially minted coins appeared around 600 BCE in the ancient kingdom of Lydia, in what is now modern-day Turkey. These coins, known as Lydian staters, were made of a naturally occurring alloy of gold and silver called electrum. Their introduction marked a revolutionary moment in the history of money, as they provided a standardised and portable form of wealth.

The use of coins spread rapidly across the Mediterranean and beyond, facilitated by empires like the Greeks and Romans. Coins were eventually complemented by paper money, first issued in China during the Tang Dynasty (7th century) and later formalised during the Song Dynasty in the 11th century.

What can cause inflation?

In January, this year 2024 I was heading to my favourite bakery to get my favourite bread that I found in December 2023, arriving there I found that the bread that I loved is now costing a bit more than it did last month. Why does this happen? There are many reasons inflation can creep into our day to day lives—over seven, in fact—but let us focus on the three most common and relatable causes:

Picture this: it is the holiday season, and everyone is rushing to buy the hottest new iPhone 16 pro max 1 TB. The shelves empty faster than the Apple can restock. As more clients come in to get the brand-new iPhone and apple staffs cannot handle it to make over 100,000 iPhones per hour, the natural effect will be prices shoot up. This is demand-pull inflation, and it often shows up in booming economies where people have more money to spend, but the supply chain struggles to keep up.

Now, imagine that bread again. What if the price of wheat skyrockets due to a poor harvest as December was a very raining season, or fuel costs rise because of the geopolitical uncertainties around the eastern, making transportation more expensive? These higher production costs get passed down to us, the final consumer, in the form of pricier bread. This is cost-push inflation—it happens when raw materials or wages become more expensive, and businesses must charge more to cover their costs, and then they include the inflation that they got charged into the price of our end final product so, yes, we are paying “double inflation”.

Finally, there is a more psychological aspect: inflation expectations. Suppose you hear that prices are likely to rise next month. What do you do? You might rush to the supermarket to buy items now before they become more expensive. But this increased spending fuels demand, which can ironically push prices up even faster. It is a self-fulfilling prophecy that keeps inflation spiralling upward.

Inflation is not just numbers on a chart it is something we feel in our everyday lives, from the grocery store to the gas pump. By understanding these causes, we can start to see the patterns and make better decisions about how we navigate rising costs.

Understanding Inflation and Its Profound Impact on the Forex Market_3

What are the tools we can use to measure the inflation?

It’s very important to know how to measure the inflation, but let me be clear with you, there is no 100% prediction ratio for measuring the inflation, but we can always assume that is a close call from what we can possibly imagine, you first need to know some basics about it.

Consumer Price Index (CPI)

The CPI is the most widely recognised measure of inflation. It tracks changes in the price level of a fixed basket of consumer goods and services over time. The index is often presented as:

Headline CPI: Captures all items, providing an overarching view of inflation trends.

Core CPI: Excludes volatile categories such as food and energy to offer a clearer perspective on sustained inflationary trends.

The reason why is divided by 2 releases is simple, on the Headline inflation we have the added of the most volatility items such as the food and the electricity prices, this is something that the central bank can directly control or reduce the inflation on, but is very important to understanding how the headline inflation is, what the central bank really pays attention is the CORE CPI, this is where we have the exclusion of food and energies prices to make it more reliable for the central bank, as all the items on this basket they can control by the rates.

A higher inflation makes a currency stronger, as the Central bank will have to control the inflation by raising the rates (this is only one of the many other ways a central bank can adopt to control the inflation) as the inflation grows and the central bank make the rates tighter, the investor around the world will be sicking more return for their portfolio and therefore they will be investing on higher rates countries making the currency stronger because the demand for that currency will be higher.

A low than expected release can occasioned the opposite, making the investors getting out of the country and looking for better opportunities.

Producer Price Index (PPI)

Unlike the CPI, which focuses on consumer prices, the PPI measures changes in prices at the producer level. It offers early insights into potential inflationary pressures as increased production costs are often passed on to consumers. Remember when we have talked about the cost-push-inflation where you get charged double inflation, the PPI will show us on a monthly, quarterly, and early basis if the inflation for the producers is higher or lower.

Big Mac Index

What? Big Mac when we talking about such an important topic? YES! Big Mac!

I was exactly like you, and I heard about the big mac index, shocked, what is this?

The Big Mac Index is an informal measure of currency valuation created by The Economist in 1986. It uses the price of a Big Mac, a globally standardised product offered by McDonald's as a benchmark to assess the relative purchasing power of different currencies. It offers a simplified way to evaluate whether a currency is undervalued or overvalued compared to another currency, based on the principle of Purchasing Power Parity (PPP).

PPP is an economic theory saying that in an ideal world, identical goods should cost the same in every country when their prices are expressed in a common currency. For example, if a Big Mac costs $5 in the United States and £3.50 in the UK, the PPP exchange rate would be:

Understanding Inflation and Its Profound Impact on the Forex Market_4

If the actual exchange rate differs significantly from this PPP rate, the currency is considered misaligned:

If the actual exchange rate is higher, the currency is overvalued.

If the actual exchange rate is lower, the currency is undervalued.

Inflation Expectations Surveys

Central banks often gauge public and market expectations through surveys. These insights are pivotal in shaping monetary policies, as expectations influence consumer behaviour and wage negotiations, which in turn impact inflation.

Economic Data Releases

Regular statistical updates from government agencies, detailing monthly, quarterly, and annual inflation metrics, play a critical role in economic analysis. Platforms like Forex Factory’s economic calendar enable traders to track these releases, expecting market movements.

Inflation Rates Across Economic Contexts

Developed Economies

Developed economies such as the US, UK, and Eurozone nations often show low and stable inflation rates, with central banks targeting around 2%. This predictability fosters long-term investment and economic stability. Central banks like the Federal Reserve and the European Central Bank employ inflation targeting frameworks to manage economic growth while maintaining price stability.

Emerging Markets

In contrast, appearing economies, including Brazil, India, and South Africa, often experience higher inflation volatility. Factors such as commodity dependency, political instability, and structural inefficiencies contribute to these fluctuations. For instance, Brazil’s inflation rates have historically mirrored the volatility of its exchange rates and fiscal imbalances.

Inflation’s Influence on the Forex Market

Interest Rate Differentials

Inflation significantly affects currency values through interest rate policies. Central banks often raise interest rates to combat high inflation, attracting foreign capital and strengthening the currency. Conversely, low inflation may lead to accommodative monetary policies, weakening the currency. The US dollar (USD), for example, often appreciates when the Federal Reserve signals rate hikes in response to rising inflation.

Purchasing Power Parity (PPP)

PPP theory asserts that exchange rates should adjust to equalise the price of identical goods between countries. Inflation differentials play a crucial role in this adjustment. Tools like the Big Mac Index offer a practical demonstration of PPP in action, highlighting how inflation impacts currency valuation.

Market Volatility

Inflation data releases are among the most significant drivers of forex market volatility. Unexpected inflation figures can lead to rapid shifts in exchange rates as market participants adjust their expectations for future monetary policy actions.

Ok, now, how to trade the inflation reports?

Trading the CPI is easy when done on the right way, it can be incredibly rewarding if approached with a solid strategy. Here is how I trade these releases keeping it straightforward yet precise.

But before diving into how to trade the CPI, you will need to understand how I score the major pairs in forex. I have developed a system that provides a framework for figuring out the relative strength or weakness of each currency. You can watch the video by clicking play on the video below:

Now that you understand how to measure the weakness or strength of the currency you have my holy grail. This fundamental principle drives my approach that is to trade the strong currency against the weaker currency. Let me walk you through an example to illustrate:

Imagine the scoring system assigns EUR a -2 and USD a +1.

The Eurozone's CPI release is scheduled in 15 minutes, and the market expects a specific value (the consensus).

If the CPI comes in lower than expected and there are no adjustments to the previous release, it signals even more weakness in the euro, because investors will be looking to place their money into other countries remember that we’ve covered that just a few minutes ago?

With this scenario, my trade would be to short EUR/USD. But why?

The euro, already weak based on our scoring analysis, is further weakened by the disappointing CPI release.

The USD, comparatively stronger, makes it the ideal counterpart for this trade.

One last thing that you should understand is that this is a scalp nature trade and should be traded only on high impact news events, I like to trade these events for a maximum of 5 to 10 minutes with the trade open.

By combining a robust scoring system with a clear understanding of inflation data, you can trade CPI reports effectively while minimising unnecessary risks.

Here is an example of a real trade;

The Japan inflation was due on 20/12/2024 the expectation for the inflation was at 2.5%, Jpanese yen was trading with a score of +1 and USD was trading at -1 scoring the release came as follow for the Japan CPI.

Understanding Inflation and Its Profound Impact on the Forex Market_5

With a higher-than-expected release for the Japan CPI, we could use the strength of the JPY (at that moment) to long it against a weaker currency like the USD. Remembering that a weaker currency on the base (Base/Quote) and strong on the quote makes the chart go down, as the opposite makes the chart goes up.

Here is the trade to short USDJPY:

Understanding Inflation and Its Profound Impact on the Forex Market_6

Inflation’s Central Role in Forex Trading

Inflation remains a cornerstone of economic analysis, intricately linked to monetary policy, currency valuation, and market behaviour. By understanding its causes, measurement tools, and implications for the forex market, traders can develop robust strategies to navigate inflation-driven dynamics. Whether through interest rate speculation, strategic currency pair selection, or the use of custom indicators, forex participants can harness inflation insights to make informed trading decisions.

This in-depth exploration underscores the pervasive influence of inflation on global markets, equipping traders and economists with the expertise to translate economic theory into actionable strategies. As inflation continues to shape the financial landscape, mastering its intricacies will remain indispensable for success in the forex market.

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

Risk Warnings and Disclaimers

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Alex

Economic

Cryptocurrency

A Bitcoin rally is fizzling in the final days of a record-breaking year for the digital asset, as investors assess the remaining impetus from President-elect Donald Trump’s embrace of the cryptocurrency sector.

The largest token changed hands at $95,600 as of 8:45 a.m. Friday in Singapore, holding a retreat of almost 3% from a day earlier. Smaller rivals including Ether and Dogecoin, a favorite of the meme crowd, struggled for traction.

Bitcoin Rally Fizzles as Token’s Record-Breaking Year Winds Down_1

Trump is pushing ahead with a promise to create a crypto-friendly environment in the US and has backed the idea of establishing a national Bitcoin reserve. Traders are waiting to see if such a stockpile is feasible.

The crypto market is also braced for the expiry of a substantial quantity of Bitcoin and Ether options contracts on Friday — one of the biggest such events in the history of digital assets, according to prime broker FalconX.

Sean McNulty, director of trading at liquidity provider Arbelos Markets, flagged the risk of a “choppy market” amid the expiry of the derivatives positions.

Bitcoin is wavering even after MicroStrategy Inc. this week signaled the possibility of expanding its program of purchases of the token. The company has transformed itself from a software maker into a Bitcoin accumulator and now owns more than $40 billion of the digital asset.

The original cryptocurrency is headed toward a drop for December, which would be its first monthly decline in four, according to data compiled by Bloomberg. Bitcoin reached a record high of $108,316 on Dec. 17 before pulling back. Bitcoin Rally Fizzles as Token’s Record-Breaking Year Winds Down_2

Bitcoin Rally Fizzles as Token’s Record-Breaking Year Winds Down_2

Source: Bloomberg

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Risk Warnings and Disclaimers

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Cohen

Economic

MELAKA (Dec 27): The Netherlands, Hong Kong and Japan are the top three investors in Melaka, said Chief Minister Datuk Seri Ab Rauf Yusoh.

He said the Netherlands had invested RM8.4 billion, creating 2,505 job opportunities, while Hong Kong invested RM1.7 billion (1,230 jobs), and Japan invested RM1.296 billion (7,359 jobs).

Ab Rauf also said that the electrical and electronics sector topped the investment list with a value of RM11.975 billion (generating 8,192 jobs), followed by non-metallic mineral projects amounting to RM1.840 billion (1,276 jobs), and machinery and equipment investments totalling RM1.671 billion (1,194 jobs).

“The Melaka government is committed to increasing investments in these sectors by exploring high-tech industrial development opportunities based on the principles of ESG (environmental, social and governance).

“Key initiatives include the development of new industrial areas, such as the MCorp Hi-Tech Park and the German Technology Park, to cater to investors’ growing focus on sustainable technology and innovation,” he said during the state assembly at Seri Negeri on Friday.

He was responding to a question from Datuk Zaidi Attan (Barisan Nasional-Serkam) regarding the top investing countries in Melaka, the sectors with high investments, and the number of jobs created.

Ab Rauf further said that the state aims to attract investors seeking modern infrastructure, a skilled workforce and sustainable development strategies.

He said this aligns with the state government’s efforts to boost Melaka’s competitiveness as an investment destination, especially in manufacturing sectors such as electrical and electronics, semiconductors, machining and equipment.

In addition, he said the state government had taken proactive steps to ensure an adequate supply of skilled workers, including establishing the Melaka TVET Council on Oct 29, 2022 to strengthen collaboration between industries and technical and vocational education and training (TVET) institutions.

“This council aims to address workforce gaps, and ensure that skills taught in TVET institutions align with current and industrial needs,” he said.

Source: Theedgemarkets

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Cohen

Political

Economic

SEOUL (Dec 27): South Korea's acting president faces an impeachment vote on Friday, intensifying a political crisis as the Constitutional Court meets for its first hearing on suspended President Yoon Suk Yeol's short-lived martial law.

The push to impeach Prime Minister Han Duck-soo, who has been acting president since Yoon was impeached on Dec 14, has thrown South Korea's once-vibrant democratic success story into uncharted territory and watched with concern by allies.

The plan for a vote to impeach Han was unveiled on Thursday by the main opposition Democratic Party after he declined to immediately appoint three justices to fill vacancies at the Constitutional Court, saying it would exceed his acting role.

It remained unclear how many votes are needed to impeach Han as acting leader. The threshold for a prime minister is a simple majority, while a two-thirds majority is needed for a president. It is also unclear whether Han and the ruling party would accept any outcome.

If Han is suspended, Finance Minister Choi Sang-mok will assume the acting presidency by law.

Choi said on Friday impeaching the country's acting president would seriously damage the country's economic credibility and asked political parties to withdraw the plan. Choi spoke for the country's cabinet, flanked by ministers.

Early on Friday, the South Korean won weakened to its lowest since March 2009, as analysts said there was little to reverse the negative sentiment stemming from the political uncertainty.

The vote to determine Han's fate comes around the time the Constitutional Court on Friday will hold its first hearing in a case reviewing whether to reinstate Yoon or remove him permanently from office, after parliament's impeachment vote. It has 180 days to reach a decision.

After weeks of defiance ignoring requests by the court to submit documents as well as summons by investigators in a separate criminal case over his martial law declaration on Dec 3, a lawyer for Yoon said his legal representatives would attend Friday's hearing.

Seok Dong-hyeon, a lawyer advising Yoon, named two lawyers for Yoon's legal team, one a former prosecutor and the other a former spokesman for the Constitutional Court. The two could not be immediately reached for comment.

Yoon is not required to attend the hearing. If he is removed from office, a new presidential election would be held within 60 days.

Worst political crisis in decades

The events following the Dec 3 martial law declaration have plunged the country into its gravest political crisis since 1987, when widespread protests forced the ruling party of former military generals into accepting a constitutional amendment bringing in direct, popular vote to elect the president.

The turmoil has also spilled over into financial markets. Yoon shocked the country and the world with a late-night announcement on Dec 3 that he was imposing martial law to overcome political deadlock and root out "anti-state forces".

The military deployed special forces to the national assembly, the election commission, and the office of a liberal YouTube commentator.

It also issued orders banning activity by parliament and political parties, as well as calling for government control of the media.

But within hours 190 lawmakers had defied the cordons of troops and police and voted against Yoon's order. About six hours after his initial decree, the president rescinded the order.

Yoon and senior members of his administration also face criminal investigations for insurrection over their decision to impose martial law.

Source: Theedgemarkets

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FOREX.com

Economic

Forex

2025 EUR/USD Technical Outlook Preview_1

Euro continues to trade within the confines of an ascending pitchfork formation extending off the 2022 low with the April advance faltering just ahead of resistance at 1.1275 into the close of Q2. The subsequent reversal was poised to close a third-consecutive monthly loss as of late December with EUR/USD attempting to mark a close below support around the 2015 low at 1.0463- looking for clear inflection off this mark into the yearly cross.

Note that monthly momentum readings have reached the lowest levels in over a year and an RSI reading sub-forty into the close would suggest a larger shift in the momentum profile favoring the bears. Critical support rests with Parity while key resistance (bearish invalidation) for the broader downtrend is eyed with the 2020 low-month close (LMC) / the objective 2024 yearly open at 1.1032/38.

2025 EUR/USD Technical Outlook Preview_2

A closer look at the weekly chart shows the November rebound off the lower parallel of a descending pitchfork we have been tracking off the September highs. Initial weekly support rests with the 2016 swing low at 1.0352. Ultimately, a break below the lower parallel would threaten the next major leg of the decline towards the 61.8% retracement of the 2022 advance at 1.02 and parity- both levels of interest for possible downside exhaustion / price inflection IF reached.

Weekly resistance stands with the November high-week close (HWC) / February low-week close (LWC) at 1.0719/77- a breach / close above this threshold would be needed to suggest a more significant low is in place / a larger trend reversal is underway. Subsequent resistance eyed at the March HWC a 1.0939 and the December HWC / 2024 yearly open at 1.1038- both levels of interest for possible topside exhaustion / price inflection IF reached.

Bottom Line: Euro remains vulnerable to further losses heading into the 2025 open and the focus is on an exhaustion low in the first half of the year. From a trading standpoint, the threat remains weighted to the downside while below 1.0777 – look for a larger reaction on stretch towards the lower parallel for guidance with a closer below 1.02 needed to fuel the next major leg of the decline. The onus is on the bulls to try to secure a low ahead of parity IF the 2022 advance is to remain viable in the coming year. The EUR/USD battle lines are drawn heading into 2025.

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

Risk Warnings and Disclaimers

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Justin

Economic

Bond

(Dec 27): Chinese government bonds are primed for their best year in a decade, with local fund managers and strategists predicting more gains for 2025.

They are set to reap a 9% total return in 2024, the highest since 2014, as measured by a Bloomberg Index which excludes currency moves. The nation’s 10-year yields have plummeted 84 basis points since January, dropping to 1.71% on Thursday.

Chinese bonds have beaten major global peers this year as prolonged economic weakness and a slowdown in consumer spending drive bets for more monetary easing. Tianfeng Securities, Zheshang Securities and Standard Chartered Bank forecast 10-year yields to drop to as low as 1.5%-1.6% by the end of 2025.

“There are a lot of uncertainties for the economy next year, with much pending on the development of trade conflicts and the dollar’s strength,” said Zhang Liling, a fixed-income investment director at Bosera Fund Management Co. that oversees 29.7 billion yuan (US$4.1 billion or RM18.22 billion) of assets.

The rally lost a bit of steam this week on worries over a surge in debt issuance. China’s policymakers plan to sell a record three trillion yuan of special treasury bonds in 2025, up from one trillion yuan this year, according to a Reuters report. Additionally, the finance ministry also reaffirmed its pledge to expand the fiscal deficit ratio and boost spending.

Still, history shows that the local bond market will likely absorb the increased supply, particularly if the People’s Bank of China maintains its accommodative stance and economic growth remains subdued.

“We are still positive about bonds next year” given the prospect for rate cuts, said Zhu Zhengxing, who manages 74.5 billion yuan at Fullgoal Fund Management Co. Initial fears of larger supply this quarter have hardly made a dent in market sentiment as demand kept increasing, he added.

The impact of increased debt supply may have a more pronounced impact on the yield curve’s shape rather than the overall direction of yields. Bosera Fund’s Zhang said he favours shorter- and medium-dated notes for next year, adding that the downside for long-term yields is limited due to heavier issuance.

Despite lower yields, Chinese bonds still offer value as a safe-haven asset, he said. “Very few assets offer certainty of not losing money in a deflationary environment.”