Bruised Dollar Wobbles as Traders Eye US Rate Cuts Next Year

Forex

Summary:

The dollar nursed steep losses on Thursday and was headed for a yearly decline after two years of strong gains as expectations of interest rate cuts from the Federal Reserve next year grip markets.

With the year coming to a close, thin liquidity and limited moves are expected until the New Year.

The dollar index, which measures the U.S. currency against six rivals, fell to a fresh five month low of 100.81. The index fell 0.5 per cent on Wednesday and is on course for a 2.6 per cent decline this year, snapping two straight years of strong gains.

Investor focus remains on the timing of the interest rate cuts from the Fed, with markets pricing in a 89 per cent chance of a cut in March 2024, according to CME FedWatch tool. Futures imply as much as 158 basis points of Fed easing next year.

Some analysts though remain unconvinced the U.S. central bank would be so aggressive.

"We still believe that a March policy change toward easing is much too early and there is quite a bit of potential for a dollar rally if and when such action does not materialize," Monex USA analysts said in a note.

While the Fed took an unexpectedly dovish stance in its December meeting, opening the door to rate cuts next year, other major central banks, including European Central Bank retained their stance of needing to keep rates higher for longer.

Markets though are still pricing in as much as 165 basis points of rate cuts from the ECB next year.

"The European and UK economies are in a much more precarious state and we believe this will force their respective central banks to cut interest rates both before they are fully ready and before the Fed does so," said the Monex USA analysts, noting the divergence in the outlooks for the U.S. and European economies.

The euro was up 0.09 per cent at $1.1113, couched just below the five-month peak of $1.1122 hit on Wednesday. The single currency headed for a yearly gain of 3.7 per cent, its strongest performance since 2020.

Sterling was last at $1.2813, its highest since Aug. 10. The pound is headed for a 6 per cent gain in the year, its strongest performance since 2017.

Investors expect that the Bank of England will not be able to cut rates as much as the Fed and ECB, given inflation is running higher in the UK.

That has widened the gap between British bond yields and those in the U.S. and Europe, making them look more attractive and boosting the pound.

Meanwhile, the Japanese yen strengthened 0.23 per cent to 141.50 per dollar, inching closer to a five-month peak of 140.95 it touched earlier this month.

The Asian currency is up 4 per cent against the dollar in December, heading for its second straight month of gains on increased expectations that the Bank of Japan may soon move away from its ultra-loose monetary policy.

The central bank, however, stuck to its policy earlier this month and Governor Kazuo Ueda on Wednesday said he was in no rush to unwind ultra-loose monetary policy as the risk of inflation running well above 2 per cent and accelerating was small.

For the year, yen is down 7 per cent against the dollar.

Rate cut bets have also boosted riskier currencies, with the Australian dollar and the New Zealand dollar perched at fresh five-month peaks. The Aussie was last up 0.26 per cent at $0.6865, while the kiwi was at $0.6360, up 0.3 per cent.

Source: Reuters

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Ukadike Micheal

Cryptocurrency

Bitcoin's recent rebound is attributed to renewed speculation surrounding the potential approval of a US Securities and Exchange Commission (SEC)-regulated exchange-traded fund (ETF) directly investing in the cryptocurrency. The digital asset experienced a surge of up to 2.1%, reaching approximately $43,000 and recovering from a recent downturn. Grayscale Investments' announcement of Barry Silbert's resignation as chairman has garnered positive sentiment, with expectations that this move could influence other Grayscale products and drive institutional demand, notably in Grayscale Bitcoin Cash Trust, which witnessed an 18% surge in trading volume on Tuesday.

The market is eagerly anticipating potential approval for spot Bitcoin ETFs, with concerns about a "news selling event" and the potential impact of profit-taking once approval is granted. Bitcoin's 2023 rally is influenced by expectations of declining US interest rates, contributing to its recovery from the significant crash in 2022. However, it is noteworthy that Bitcoin's current value remains below its 2021 record of nearly $69,000.

Notably, Grayscale Investments aims to convert its Bitcoin trust, the world's largest, into an ETF, awaiting the SEC's decision before the January 10 deadline. The industry is watching closely as this move could potentially widen the base of crypto investors in the medium term. Hayden Hughes, co-founder of the social-trading platform Alpha Impact, sees Silbert's resignation as a positive sentiment for Bitcoin demand, and there are expectations that the SEC might allow other Grayscale products to be listed as ETFs.

While Bitcoin's resurgence is partially attributed to optimistic expectations regarding the SEC's stance on ETF approval, the market remains uncertain about the potential interest in spot Bitcoin ETFs planned by major entities like BlackRock Inc. and Fidelity Investments. The dynamics of "buying the rumor and selling the news" could come into play, where investors might react to the actual approval with profit-taking.

Bitcoin's recent trajectory is intricately tied to regulatory developments and institutional interest, with the impending decision on Grayscale's ETF conversion holding significant weight. As Bitcoin continues its recovery, market participants are closely monitoring both short-term trading dynamics and the longer-term impact of potential regulatory approvals.

Source: Bloomberg

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Ukadike Micheal

Stocks

The anticipated soft landing in the coming year, promising further gains in US stocks, suggests a potential decline in the extraordinary outperformance exhibited by technology giants in 2023. The Magnificent Seven, including Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla, which contributed significantly to the S&P 500's advance, may see a shift in investor sentiment. As confidence in the economy grows post the Federal Reserve's interest-rate hike, the once-dominant tech sector experiences more moderate gains, leading investors to explore opportunities in smaller tech stocks and other previously undervalued sectors.

The surge in the Magnificent Seven, responsible for nearly two-thirds of the S&P 500's advance this year, was initially fueled by their earnings growth, robust cash flow, and strong balance sheets, positioning them as haven stocks during times of economic uncertainty. This surge, amplified by the AI boom, marked an impressive 100% rise through mid-July, outpacing the S&P 500's 20% increase. However, as the Federal Reserve's July interest-rate hike signaled a growing confidence in the economy and investors embraced the soft-landing narrative, the tech giants' gains began to moderate. Since the end of July, the group has seen a 6% increase, compared to the broader market's 4% rise.

While there remains a camp of economists predicting a potential recession triggered by the Fed's actions to combat inflation, investors are currently favoring the soft-landing view. This shift has prompted them to expand their horizons beyond the Magnificent Seven, exploring opportunities in smaller tech stocks and other sectors that faced challenges throughout 2023. Despite the potential pause in the exceptional performance of the tech giants, some investors view them as good hedges within a diversified portfolio.

A closer look at the seven largest stocks by market value reveals distinct positions heading into 2024:

1. Apple: The tech giant has soared about 50% this year, with a market value surpassing $3 trillion, making it the world's most valuable company. Despite its impressive performance, challenges lie ahead, including a potential recovery in cyclical iPhone and personal computer sales in the second half of 2024 and the growth dependence on China's consumers.

2. Microsoft: Setting an all-time high this year, Microsoft benefits from optimism surrounding AI and cloud growth, particularly with the integration of OpenAI's ChatGPT technology into its products. Considered well-positioned to capitalize on AI, Microsoft is viewed by some investors as a potential winner in the AI race.

3. Amazon: Experiencing an 80% increase in shares since October, Amazon's growth in its AWS cloud unit has contributed to its positive performance.

4. Nvidia: The top performer in both the S&P 500 and Nasdaq 100, Nvidia has seen a remarkable 200% rally this year, driven by high expectations and strong demand for its chips. The market has high hopes for the chipmaker, with analysts overwhelmingly bullish on the stock.

5. Alphabet: Up 60% this year, Alphabet emerges as Microsoft's significant competitor in AI and cloud products. With a relatively reasonable valuation compared to its peers, Alphabet stands out as one of the more reasonably priced stocks among the Magnificent Seven.

6. Meta: Boasting nearly tripled shares in 2023, Meta remains a high flyer in the era of social media. Despite its impressive performance, Meta's shares are below their 2021 high, indicating potential growth opportunities.

7. Tesla: More than doubling in 2023, Tesla has faced a choppier year, with analysts adjusting expectations for deliveries and profits as demand cools across the electric-vehicle industry. Despite recent skepticism, bulls see Tesla's leading position and its potential to tap into trends like AI as long-term tailwinds.

The evolving landscape for the Magnificent Seven suggests a shift in investor sentiment as the soft-landing scenario takes precedence. While the tech giants face challenges, including economic uncertainties and evolving trends, they continue to play a significant role in investors' portfolios, serving as hedges in a dynamic market environment.

Source: Bloomberg

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Chandan Gupta

Cryptocurrency

Traders' Opinions

Let's dive deeper into the cryptocurrency realm, particularly the influence of interest rates on Bitcoin, the patterns in Bitcoin's market movements, institutional participation, resistance levels, and the broader landscape of investor sentiment and strategies.

Cryptocurrencies, led by Bitcoin, often sway in response to changes in interest rates. It's like this weird seesaw: when interest rates drop, Bitcoin tends to shine brighter. Why? Well, Bitcoin's like that cool kid at the party—the lower the cost of borrowing, the more attractive it becomes for big investors. They're all like, "Hey, cheap money! Let's join the crypto fun!"

But here's where things get a bit holiday-ish. Around New Year's, these big institutional players often step back. It's like they're saying, "Nah, these markets are too quiet for our taste." Funny enough, their absence might stir things up—Bitcoin could suddenly throw a volatility party! It's like the quieter it gets, the louder Bitcoin shouts.

Now, if we peek at Bitcoin's price chart, it's like a game of hide and seek. Every time Bitcoin hides a bit (we call it a retracement), bam! Buyers appear out of thin air! It's been a trend for a while now—months, to be precise. Right now, it's in this "let's gather value slowly" phase. But watch out! There's a big, grumpy crowd around the $44,250 mark. If Bitcoin crashes that party, it might strut right up to $45,000, even eyeing the glamorous $50,000 level.

So, here's the tea, everyone's hyped about Bitcoin. It's been on this crazy bullish run, and investors are all in for the ride. But hold your horses! Don't chuck all your coins in at once! Every dip could be a golden ticket to snatch up more Bitcoin. Shorting Bitcoin? Hmm, not such a brilliant idea, unless it goes belly-up past $38,000—then it's time to put on the party pooper hat.

And here's why everyone's buzzing about Bitcoin: interest rates are dropping like it's hot in the US and other major banks. So, it's like an open invitation for folks to jump into the crypto pool. I'm feeling optimistic about it, but hey, it's holiday season vibes all around! Think of Bitcoin like a rollercoaster—wild and thrilling. Every dip could be your chance to scoop up more crypto riches. Stay savvy, stay cautious, and enjoy the crypto rollercoaster ride while it lasts! BITCOIN: Spots Buyers With Every Downturn_1

BITCOIN: Spots Buyers With Every Downturn_1

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Ukadike Micheal

Energy

Economic

European natural gas futures surged in response to an escalation in the Gaza conflict, with the potential for broader regional implications. Benchmark contracts in the Netherlands saw a notable 6% increase early on Wednesday, driven by US strikes on Iraqi targets and fresh attacks by Houthi militants in the Red Sea, heightening concerns about the Middle East's stability. Despite the rise in geopolitical tensions, European gas prices have maintained a relatively narrow range, currently on track for a yearly loss exceeding 50%, supported by ample fuel inventories and subdued demand.

The surge in gas futures follows US strikes on Iraqi targets and Houthi attacks in the Red Sea, contributing to an overall rise in market anxiety over the stability of the Middle East. Ship diversions and altered LNG cargo routes have been observed, indicating concerns about potential threats to major energy export transit routes. Although Europe has experienced relatively stable gas prices, the market remains vigilant, with geopolitical tensions and transit risks in the Red Sea presenting potential bullish risks for 2024.

Despite the geopolitical concerns, weather conditions in most of Europe are expected to remain mild into early January, resulting in lower demand for heating gas. Some countries, including Germany, Austria, Belgium, and Denmark, have utilized this period to replenish fuel inventories during Christmas. Gas prices in the region have held steady, with Dutch front-month gas trading 5.6% higher at €36.08 a megawatt-hour, and the UK equivalent contract registering a 5.7% increase as of 8:48 a.m. in Amsterdam.

The surge in European gas futures, driven by geopolitical tensions in the Middle East, underscores the impact of global events on energy markets. While concerns persist, stable prices, ample inventories, and muted demand provide some reassurance for the continent. The evolving situation calls for continued vigilance in the energy markets, with geopolitical risks remaining a key factor to watch.

Source: Bloomberg

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Chandan Gupta

Traders' Opinions

Forex

Fundamental Analysis

Hey there! So, imagine this, the USD/JPY is doing its holiday dance around 142.45, chillin' like a pro in the quiet holiday season. Why? 'Cause holidays mean less action and more "meh" vibes for the USD/JPY, affecting how investors feel about risk and cash flow. It's like the calm before a financial storm, but a really chill one.

Now, the Japanese yen has been flexing its muscles, getting stronger against the dollar lately—over 6% stronger since November. But hold your horses! History's whispering that this yen parade might just be reaching its grand finale. Why? 'Cause when big investors start getting all starry-eyed over the yen, it tends to flip the script real quick. They go from buying big to selling faster than you can say "yen-yen."

Get this: Managers, those big financial decision-makers, took a turn from "meh" to "yay" on the yen in early January. Result? The yen went downhill—like an 8% slip 'n slide against the dollar in the weeks that followed. That yen's got mood swings, I tell ya!

But wait, there's more drama! Forecasters were all, "Yen's gonna rise in 2023, folks!" Turns out, it didn't. Nope, instead, it took a nosedive. Three years of "down, down, down," and suddenly, they're all predicting a yen-yen bounce-up again next year. The yen's playing hard to get, keeping everyone on their toes, especially with the Bank of Japan hinting at ending its negative interest rate era. Sly moves, Bank of Japan, real sly!

Now, here's a curveball: Someone said, "Sell the Swiss franc against the Japanese yen!" Why? 'Cause apparently, they were hitting sky-high levels in November. Meanwhile, the yen itself took a dive against the US dollar this year, earning the title of "Worst Performer" among its rich buddies in the currency world. Oh boy, the yen's having a rollercoaster year!

But hold onto your hats, 'cause across the pond, the US Federal Reserve is doing its balancing act. They're trying to chill the economy a bit by cranking up those US interest rates to keep that wild inflation in check. Yet, they gotta be careful not to push the country straight into recession town. It's like they're walking a tightrope with clown shoes—it's serious, but you can't help but giggle.

Traders are basically saying, "Fed, we bet you're gonna drop those interest rates by at least 1.50 percentage points next year!" That's some serious betting happening there. And the current federal funds rate? It's hanging out between 5.25% and 5.50%, the highest it's been in ages. Big numbers, big decisions!

Oh, and the Fed made forecasts! They're thinking, "Yeah, we might cut those US interest rates a few times next year, but not as much as y'all think." It's like they're telling Wall Street, "Hey, slow your roll!" And speaking of Wall Street, it's been throwing a party in the stock market since October, all pumped up for that support from the Fed.

So, what's the lesson here? Well, maybe the surge in stocks got a bit too excited, like kids at a candy store. And the Fed's looking at the situation like a parent saying, "Okay, enough sugar, time to calm down." But hey, who knows? Maybe the markets need a little sweet treat every now and then.

In the end, it's like a financial soap opera out there. The yen's playing games, the Fed's doing its balancing act, and investors? Well, they're just trying to make sense of this wild ride. So, grab some popcorn and enjoy the show, 'cause this financial rollercoaster ain't slowing down anytime soon!

Technical Analysis

Alright, so picture this, the USD/JPY chart is doing its daily dance, hinting at a downward slide towards the 140.00 mark. Why? Well, if the dollar stays all floppy and Japan keeps teasing about changing policies, we might just take that plunge. But wait, if the bullish gang swoops in and pushes it up to 145.85, kaboom! That might just shatter this gloomy trend. Guess the market's taking a snooze until everyone's back from the holiday break next week.

But hold onto your hats, folks! If we nosedive below ¥141, brace yourself for more dollar drama. Yet, if we magically leap over that 200-day Exponential Moving Average, hello, bull run to ¥145! That move's gonna make traders drop their coffee cups in excitement.

So, here's the scoop: the USD and JPY are locked in a game of stability tug-of-war. Keep those eyes peeled for ¥141 and ¥145—they're the boss here. Traders, stay on your toes for any surprises that could shake this snoozy market. Until the big fireworks start, well, it's like waiting for the party to kick off but everyone's stuck in holiday mode—boring! USDJPY: BoJ Policy Change Bets Rise Higher_1

USDJPY: BoJ Policy Change Bets Rise Higher_1

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Economic

Forex

Stocks

Stocks get another gift from Santa

Equities look set to end the year in buoyant form as the disinflation theme continues to fuel the rally in global risk assets. Shares on Wall Street extended their year-to-date gains on Tuesday after the final major data release of 2023 endorsed the view that central banks will begin to cut rates sooner rather than later.

Core PCE inflation in the United States slowed slightly more than expected in November, easing to 3.2% y/y from a downwardly revised 3.4% y/y in October. Personal consumption was subdued for a second month but without flashing any alarm bells, all of which support the soft landing narrative.

Expectations for Fed rate cuts strengthened on the back of the data and markets are currently pricing in around 155 basis points of cut by December 2024, widening the gap with FOMC members' own predicted rate path.

Is inflation dead?

In the absence of any new inflationary threat and clear evidence that the American economy is no longer running on all cylinders, there's little reason for traders at the moment to be as cautious on the inflation outlook as policymakers are.

Everything points to a slowing economy and an inflation trend that's firmly headed downwards, so a rate cut as early as March is not that inconceivable. If there is anything that can spoil this optimism, it is an upside surprise in the next jobs report. Weekly jobless claims have been somewhat lower in December compared to November, so a strong payrolls print is possible in next week's report. But until then, there's little that's likely to get in the way of the risk rally.

Global stock rally gathers pace

The S&P 500 closed at a record high on Tuesday and came close to beating its all-time intraday high from January 2022. The Nasdaq 100, meanwhile, climbed further in uncharted territory, closing at a new record peak.

The upbeat mood is continuing today in Asia and Europe where many markets are reopening after the long Christmas weekend. Shares in Hong Kong and China are some of the best performers as gaming stocks have rebounded after Beijing stepped in to reassure investors about its plans for new regulatory curbs for the gaming industry following last week's surprise announcement that triggered a sharp selloff.

Dollar mixed as yen struggles after BoJ Summary

It was a slightly different picture in FX markets, however, as the major currencies were subdued in thin holiday trade. The US dollar slid to fresh five-month lows against a basket of currencies, as it remained pressured from falling Treasury yields. The euro advanced further above the $1.10 handle, but sterling was slightly softer.

The Japanese yen was also weaker on Wednesday after the Summary of Opinions of the Bank of Japan's December policy meeting did not suggest that a rate hike was imminent. Policymakers appeared split on the need to make an early exit from stimulus. Comments from Governor Ueda on Monday indicated that the Bank is still waiting to see more sustainable wage growth before making any decision.

If it wasn't for the rate cut wagers for the Fed, the yen would likely be facing a steeper selloff right now. Nevertheless, with the dollar on the backfoot and the BoJ in wait-and-see mode, the yen might manage to hold steady for a while.

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

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