Rising Sun Japanese Stock Market Leads Asia in 2023

Stocks

Summary:

The Japanese stock market is set to close in 2023 as the top-performing market in Asia, with the Nikkei index surging by 28%, reaching its highest level since 1989. This remarkable growth is attributed to structural changes in the economy, improved corporate performance, and increased foreign investments driven by a weakened yen. Experts anticipate continued success in 2024, with a focus on the yen's performance and expectations of less stringent monetary policies.

In a remarkable turn of events, the Japanese stock market is set to close in 2023 as the standout performer in Asia, with the Nikkei index soaring by an impressive 28%, reaching its highest level since 1989. Unlike the bubble-driven surge witnessed at the end of the '80s, this recent upswing is underpinned by structural shifts in the economy and outstanding corporate performance.

The economic landscape of Tokyo has undergone significant improvements, fueled in part by a weakened yen that has bolstered the competitiveness of Japanese products on the global stage. This, in turn, has led to a surge in corporate performance, with Japanese companies expanding spending, particularly in capital investments. Reports indicate that the fiscal year 2023 is poised to witness a record high in capital expenditure.

Foreign investments have played a pivotal role in boosting the Nikkei index, with global investor Warren Buffett expressing positive expectations for the Japanese market. The weakened yen and the upside potential of stocks have presented lucrative opportunities for foreign investors. The Chief Economist at Pictet Bank highlights the impact of supply chain relocations from China, citing technology-intensive sectors like semiconductors as major beneficiaries.

As we step into the new year, experts remain optimistic about the trajectory of Japanese stocks. The Research Director at Phillip Securities Research suggests that the yen will likely remain in focus and may outperform in 2024. This optimism is fueled by factors such as the global decline in interest rates, a surge in tourism, and real wage growth, all of which contribute to a positive outlook for the Japanese economy. Rising Sun Japanese Stock Market Leads Asia in 2023_1

Rising Sun Japanese Stock Market Leads Asia in 2023_1

NIKKEI225 Chart

The ongoing changes in the Japanese market have heightened expectations among traders and investors. Many foresee the Bank of Japan adopting less stringent monetary policies in the coming months, aligning with the nation's aspirations for sustained economic improvement. This anticipation reflects the confidence in the continued growth of the Japanese stock market, as it evolves in response to both domestic and global economic dynamics. The rising sun of Japan's economic resurgence seems poised to shine even brighter in the years to come.

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Swissquote

Forex

Stocks

Commodity

Here we are, on the last trading day of the year. This year was completely different than what was expected. We were expecting the US to enter recession, but the US printed around 5% growth in Q3. We were expecting the Chinese post-Covid reopening to boost Chinese growth and fuel global inflation, but a year after the end of China's zero-Covid measures, China is suffocating due to an unexpected deflation and worsening property crisis. We were expecting last year's negative correlation between stocks and bonds to reverse – as recession would boost bond appetite but batter stocks. None happened.

The biggest takeaway of this year is the birth of ChatGPT which propelled AI right into the middle of our lives. Nasdaq 100 stocks close the year at an ATH, Nvidia – which was the biggest winner of this year's AI rally dwarfed everything that compared to it. Nvidia shares gained more than 350% this year. That's more than twice the performance of Bitcoin – which also had a good year mind you.

Besides Nvidia, ChatGPT's sugar daddy Microsoft, Apple, Amazon, Meta, Google and Tesla – the so-called Magnificent 7 generated almost all of the S&P500 and Nasdaq100's returns this year. And thanks to this few handfuls of stocks, Nasdaq100 is set for its best year since 1999 following a $7 trillion surge.

The million-dollar question is what will happen next year. Of course, we don't know, nobody knows, and our crystal balls completely missed the AI rally that marked 2023, yet the general expectation is a cool down in the technology rally, and a rebalancing between the big tech stocks and the S&P493 on narrowing profit lead for the Magnificent 7 compared to the rest of the index in 2024.

The other thing is, the S&P500's direction next year is unclear as the Federal Reserve (Fed) is expected to start chopping the interest rates, with the first-rate cut expected to happen as early as much with more than 85% probability. So what will the Fed cuts mean for the S&P500? Looking at what happened in the past, the S&P500 typically rises after the first rate cut, but the sustainability of the gains will depend on the underlying economic fundamentals. Lower rates are good for the S&P500 valuations EXCEPT when the economy enters recession within the next 12 months. So that backs the idea that I have been trying to convey here since weeks: lower US yields will be supportive of the S&P500 valuations as long as the economy remains strong, and earnings expectations hold up.

For now, they do. The S&P500 earnings will certainly end a bit better than flat this year, and the EPS is expected to rise by more than 10% next year. The Magnificent 7 are expected to post around 22% EPS growth next year. But note that, these expectations are mostly priced in, so yes, there will still be a hangover and a correction period after a relentless two-month rally triggered a broad-based risk euphoria among investors. The S&P500 is about to print its 9th consecutive week of gains – which would be its longest winning streak in 20 years.

In the FX, the US dollar index rebounded yesterday as treasury yields rose following a weak sale of 7-year notes. But the US dollar is still set for its worse year since 2020. Gold prepares to close the year near ATH, the EURUSD will likely reach the finish line above 1.10 and the USDJPY having tested but hasn't been able to clear the 140 support. In the coming weeks, I would expect the EURUSD to ease on rising expectations from the ECB doves, and/or on the back of a retreat from the Fed doves. We could see a minor rebound in the USDJPY if the Japanese manage to calm down the BoJ hawks' ambitions. Overall, I wouldn't be surprised to see the US dollar recover against most majors in the first weeks of next year.

In the energy, crude oil remains downbeat. The barrel of American crude couldn't extend rally after breaking the $75pb earlier this week, and that failure to add on to the gains is now bringing the oil bears back to the market. The barrel of US crude sank below the $72pb as the US oil inventories slumped by more than 7mio barrels last week, much more than a 2-mio-barrel decline expected. The latter brought forward the demand concerns and washed out the supply worries due to the Red Sea tensions. Note that crude oil is set for its biggest yearly decline since 2020; OPEC's efforts to curb production and the rising geopolitical tensions in the Middle East remained surprisingly inefficient to boost appetite in oil this year.

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Damon

Central Bank

Recently, some of the Bank of Japan policymakers called for a deeper discussion on a future exit from ultra-loose monetary policy as the Japanese economy is making progress towards achieving the central bank's price target.

Conditions for rate hikes gradually developing

Although the Bank of Japan (BOJ) still maintains an accommodative monetary policy with negative interest rates to stimulate the market, there are divisions within the central bank. Some policymakers think the bank should take a wait-and-see approach to interest rate hikes, while others believe that there is a need to make sufficient preparations for "exiting negative rates". In short, the economy is moving in the right direction, and BOJ members are debating a future exit from the ultra-loose monetary policy.

The Ministry of Internal Affairs and Communications recently released Japan's inflation data for November. According to the data, Japan's inflation showed more signs of cooling in November, lending support to the central bank's view that price growth will slow. The core CPI (excluding fresh food) rose 2.5% year-on-year, while a deeper measure of the inflation trend that strips out fresh food and energy prices decelerated to 3.8%.

Inflation in Japan has remained above 2% for more than a year, and some companies have signaled they are prepared to continue raising wages. Per capita income, including wage gains and tax cuts scheduled to take effect in the middle of next year, will increase by 3.8%, exceeding the 2.5% inflation forecasts. This increases the likelihood that the BOJ will finally start raising interest rates and abandon its status as a dovish outlier among global central banks.

But at an earlier policy meeting, the BOJ decided to hold steady, giving little hint of when it would scrap negative rates and leaving its forward policy guidance unchanged.

When will there be a policy "shift"?

Both policymakers' debate and market data point to one direction - the likelihood of consistently achieving the 2% inflation target "continues to climb". The most obvious benefit of a slightly positive inflation rate is larger room for monetary policy responses to an economic downturn.

"If the virtuous cycle between wages and prices strengthens and the likelihood of achieving the price target in a sustainable and stable manner improves, we may consider shifting policy", said BOJ Governor Kazuo Ueda at the meeting. This is the clearest signal yet for an end to ultra-loose monetary policy.

Eyes are now on the January policy meeting. Is it likely that the policy will be shifted in January? The answer is "unlikely". A full cycle of rate hikes/cuts needs to go through processes of "slower", "higher" and "longer", i.e. from hiking/cutting rates to slowing them down (pausing) to holding them at a certain level for a period, and then to cutting/hiking rates. Currently, Japan is still in the "longer" timeframe. The BOJ needs to collect as much information and data as possible around the January policy meeting, so as to support the exit from negative interest rates. Therefore, it is unlikely to make a policy shift at the January meeting.

If January is not the time to cut rates, then when? Perhaps April is the right answer. Most investors and financial practitioners expect the BOJ to end its negative interest rate policy next year. Swap dealers price in about a 90% chance of a BOJ rate hike next April and a 60% chance of a hike next March. In a word, it is only a matter of time before the BOJ abandons negative interest rates, with April expected to be the most likely month. A small increase in short-term rates is forecast later in 2024.

Asset managers have now turned from bearish to bullish on the yen for the first time since May, and indicated that they would continue to hold long positions on the yen. The reversal has reflected the market's growing expectations for the BOJ to end negative rates.

Summary and implications

It is worth noting that the Fed's dovish shift narrows the window of opportunity for the BOJ to normalize policy. If an end to the BOJ's negative rate were to trigger a much stronger yen, it would rekindle deflationary pressure in the economy. Removing negative rates at a time when other central banks are easing policy could also cause great market volatility.

In short, to avoid interest rate hikes blocking the political and economic fundamentals, the Bank of Japan needs to maintain the easing framework while ending negative rates in pursuit of stable inflation.

While the current market focus has been on "when to end negative rates", and conditions are already in place for a policy shift, the question is in what kind of order measures will be taken. The Bank of Japan may still take other measures before considering ending the negative interest rates.

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Thomas

Palestinian-Israeli conflict

Latest news on the Israeli-Palestinian conflict

0:02

Since the Israeli-Palestinian conflict is a very long war, Hamas having a support front will force Israel to attempt to shorten the duration of the war.

Attrition support front for Hamas-allied forces in Gaza.

1. Northern Front:

Lebanese Hezbollah is inflicting casualties on Israeli soldiers on the front lines every day, with more than 500 people estimated to have been killed or injured so far. Hezbollah has forced the displacement of 100,000 Israeli settlers in the north, equivalent to the number displaced on the Gaza border, inflicting huge economic and psychological costs.

2. Yemen Front:

Sanctions on Israeli ports, a front of economic attrition, have reduced economic activity in the port of Eilat by more than 80%. Food shortages have been reported in some areas.

3. Iraq, Syria and the frontier:

Attacks on Israeli positions from Iraqi and Syrian territory and attacks on U.S. military-occupied bases.

Latest News on the Israeli-Palestinian Conflict (December 29)_1

0:36

Iran's Supreme Leader Ali Khamenei and several senior officials of the Iranian Revolutionary Guards conducted funeral prayers in the capital of Tehran for Brigadier General Mousavi, who was killed by an Israeli airstrike in Damascus, Syria on Monday.

Latest News on the Israeli-Palestinian Conflict (December 29)_2

1:18

Israeli media said: Eilat has been destroyed and hundreds of jobs have been closed. The Israeli regime has recognized the strong influence of the Yemeni army on the situation in the port of Eilat.

1:42

The Wall Street Journal reported: “Israel knew that the attack on Jabaliya would massacre civilians and children, but it bombed it anyway because Hamas members were present there.”

On October 31, the Israeli military launched an attack on Jabaliya, killing 126 people.

But the Israeli military decided not to issue warnings to civilians before the attack for fear of giving Hamas militants, including the commander of the target battalion, time to evacuate, and deployed "at least two of its weapons arsenals," Israeli army media wrote. The biggest bomb ever."

3:36

Germany’s Berliner Zeitung reported that Yemen’s Houthi armed forces warned Germany: “Don’t interfere in matters that are only related to the United States!”

4:27

Israeli Senator Lindsey Graham enthusiastically vented his "attack on Iran" rhetoric: Wipe Iran off the map!

Latest News on the Israeli-Palestinian Conflict (December 29)_3

"They have open-pit oil fields, they have Revolutionary Guard headquarters that you can see from space, wipe it off the map," Graham insisted.

4:37

Iranian Foreign Minister: Hamas told us they have enough capabilities to continue the confrontation for months.

6:07

The Israeli embassy in South Korea removed a video it produced showing an imagined attack on Seoul by masked attackers who appeared to be likened to Hamas, after the South Korean government raised concerns.

6:41

Latest News on the Israeli-Palestinian Conflict (December 29)_4

Iraqi Prime Minister Sultani: The Iraqi government is working hard to end the presence of the US-led coalition in Iraq.

7:03

Escalation: The war in Gaza is gradually taking on the appearance of a regional war.

While the intensity of the war in Gaza has remained unchanged for days, with Gaza's resistance movement claiming it could continue for months, other fronts could escalate rapidly.

Lebanese Front:

The Israeli army is preparing for military action in Lebanon to prevent Hezbollah from reaching the border. Thousands of Israelis have been displaced in the north, and Israel's surveillance system has been completely destroyed. Therefore, the Israelis are very nervous and their only solution is to go to war with Hezbollah.

Yemen Front:

While Hezbollah is causing Israel to lose human capital, the Ansarullah movement is hurting the Israeli economy by making the Red Sea expensive and dangerous for shipping companies. Yemen's defense minister has warned that if the war in Gaza does not end, the situation will seriously escalate.

Iraqi Front:

With less direct contact with Israel on the Iraqi front, the U.S. situation is becoming increasingly difficult. Iraq's prime minister says his country plans to end the U.S. presence in the country, which could give the Iraqi resistance the legitimacy to inflict serious damage on U.S. troops in Iraq.

8:18

U.S. Central Command confirmed that the destroyer USS Mason (DDG-87) intercepted a drone and an anti-ship ballistic missile launched by the Houthis in the southern Red Sea.

Yesterday at 5:45 to 6:10 pm Sanaa time in Yemen, the USS MASON (DDG 87) of the US Navy shot down a drone and an anti-ship ballistic missile launched by the Houthi armed forces in the southern Red Sea.

There was no damage to the 18 vessels in the area and no injuries were reported.

This is the 22nd attack by the Houthis on international shipping since October 19.

10:12

Ships crossing the Red Sea now use GPS to indicate they have no connection to Israel.

A Greek oil tanker leaving Russia broadcast via GPS that it had no contact with Israel and "hoped not to be targeted in the Red Sea."

One of the most important conditions put forward by General Yahya Sarri of the Yemeni Houthi armed forces is not to turn off the IAS device so that the naval forces can communicate with the ships, exchange information, and allow things to proceed peacefully.

11:33

The U.S. State Department called on Iran to immediately reverse and downgrade its nuclear program.

The joint statement issued on behalf of the United States, France, Germany and the United Kingdom condemned Iran for increasing its monthly production of 60% enriched uranium from 3 kilograms per month to 9 kilograms at its Natanz and Fordow facilities.

The statement said Iran's actions showed a lack of goodwill to de-escalate the situation and condemned Iran's actions as reckless in the current regional context.

Finally, they affirmed that Iran must not develop nuclear weapons.

18:12

Hamas, the Popular Front for the Liberation of Palestine, Jihad, the Democratic Front for the Liberation of Palestine, the Popular Front for the Liberation of Palestine and other resistance organizations issued a joint statement:

Leaders of Palestinian resistance factions held a consultative meeting in Beirut to discuss developments in the battle for the Al-Aqsa floods.

First: With pride and honor, the participants praised the bravery of our people in the occupied territories.

Second: Participants highlighted the heroic resistance in the occupied Palestinian territories, especially in the Gaza Strip. The creativity, smart tactics and actions beyond expectations displayed in the extension of the Al-Aqsa Flood strategic campaign made October 7, 2023 a turning point in history and shook the international situation.

Third: The participants affirmed the immediate and immediate combat and struggle tasks to be accomplished as follows:

1) Immediately stop the "Israeli" enemies' war of genocide, scorched-earth war, and genocide in the Gaza Strip.

2) Break the siege of the Gaza Strip and start providing our people with all the necessities of life while rebuilding and rebuilding infrastructure and facilities.

3) Arab, Islamic and international commitment to reconstruction and calls on brotherly and friendly countries, as well as international and regional organizations, especially the Arab League, the Organization of Islamic Cooperation and the United Nations, to launch an international initiative for the reconstruction of the occupation and brutal aggression in the Gaza Strip things to destroy and make serious efforts to bring life back to the arteries of the Gaza Strip.

Fourth: The participants emphasized that they condemn and reject the so-called "the day after tomorrow" vision of Gaza in Western and "Israeli" circles.

Fifth: Participants agreed on the need to counter the consequences of barbaric war on our people through a unified strategic and combat struggle, reintroducing our cause to the cause of national liberation of the occupied peoples:

1) Calls for the convening of a comprehensive national conference that includes all parties and implements without exception the agreements reached during the previous Palestinian dialogue and confronts the consequences of the brutal war on the people of the Gaza Strip, the brutal attacks by settler gangs and occupying forces, and the West Bank settlements and annexation projects, especially in the Holy City.

2) Reject all solutions and scenarios for the so-called "future of the Gaza Strip" and propose a national solution for Palestine based on the formation of a national unity government arising from a comprehensive government of national unity that includes all parties and is responsible for unity State institutions in the occupied territories of the West Bank and Gaza Strip are responsible for restoring the lives of our people there through projects aimed at rebuilding the devastation of the barbaric invasion in the Gaza Strip and preparing for the elections.

3) Fully emphasize the need for a ceasefire and a permanent cessation of all acts of aggression, as well as the need for complete withdrawal from the Gaza Strip, as a basis for discussions on the exchange of prisoners of war, the emptying of prisons and the cessation of arrests in the occupied territories of our country based on the principle of "for everyone" conditions of the people.

4) Develop and strengthen the Palestinian political system on a democratic basis, through general elections (presidential, legislative and national council), in free, fair, transparent and democratic elections based on full proportional representation, with the participation of all, thereby Rebuilding internal relations on the basis and principles of national alliance and true national partnership.

18:29

"Times of Israel" news: Israeli logistics startup opens overland trade route to bypass Houthi armed Red Sea crisis.

19:07

Tunisian President Saied: Victory is close at hand, the entire Palestine will be liberated, and the Palestinian people will establish an independent state with Jerusalem as its capital. The world is beginning to enter a new stage.

Source of the article: "Gift from the Beautiful Fairy" WeChat public account

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Owen Li

Commodity

Cocoa and iron ore prices surged in 2023, while natural gas and coal prices tumbled, with most agricultural products expected to outperform energy and industrial metals in the New Year amid supply constraints and dry weather.

The Thomson Reuters/CoreCommodity CRB Excess Return Index, which includes more than a dozen commodities such as oil, gold, sugar and copper, is set to fall 4% for 2023 after interest rate hikes dampened global growth and shook financial markets.

Cocoa prices rose 72% to multi-decade highs because of constrained supplies and iron ore was up nearly 55% as China looked to shore up its property sector.

But the prices of natural gas and coal tumbled from 2022's record highs after Russia's invasion of Ukraine and were among the biggest losers as producers ramped up supplies and demand eased.

"A warm start to this winter has kept prices deflated so far, and if it remains warm as forecast, most regions will be able to tide through this winter comfortably, with even more to spare for next year's winter," said Rystad energy analyst Lu Ming Pang.

Macquarie analysts said in a note they expect aggregate commodities price weakness to continue in 2024, with US economic growth to soon stall and European and Chinese growth likely to remain tepid at best.

Standout performers

New York cocoa futures rose to a 46-year high this year and are expected to remain strong in 2024, buoyed by a poor harvest in the key producing region, West Africa, where the spread of viral swollen shoot disease has hit crops.

Capital Economics said in a note that constrained supply combined with high seasonal demand was likely to support high cocoa prices through 2024 until new supply arrives in October, the start of the next growing season.

For iron ore, efforts by China to revive its beleaguered property sector and shore up a patchy post-pandemic economic recovery boosted prices, with more gains expected in early 2024.

"Supportive policies on the property market, coupled with expectations on further economic stimulus during the top decision-making meetings in December acted as tailwinds," said Pei Hao, a Shanghai-based analyst at brokerage FIS.

Food supply shocks

Hot and dry weather due to El Nino has taken a toll on global rice, coffee and sugar production, supporting prices.

Supply shocks in the rice market prompted India, the biggest supplier globally to restrict exports, driving prices of the world's most widely consumed staple to 15-year highs and triggering food inflation pressure.

Rice prices in Asia's key exporting centres have climbed more than 40% in 2023 and adverse weather is expected to further reduce output early next year.

Shrinking supplies also triggered a rally in coffee prices with robustas gaining almost 60% in 2023.

Sugar production in India is set to lag consumption for the first time in seven years and lower plantings could force the world's No 2 producer to turn into a net importer.

Wheat, corn and soybeans are headed for losses in 2023, but prices remain vulnerable to adverse El Nino weather, export restrictions and higher biofuel mandates.

Palm oil production is likely to fall next year due to El Nino, supporting cooking oil prices that dropped more than 10% in 2023.

Rising energy supply

Rising oil, gas and coal supply could weigh on prices for a second year in 2024.

Brent and West Texas Intermediate (WTI) crude futures are down around 7% this year, falling for the first time in three years, despite record global oil demand and deeper supply cuts from the Organization of the Petroleum Exporting Countries and its allies (Opec+).

Non-Opec production growth is set to dominate in 2024, with S&P Global Commodity Insights forecasting record crude and liquids production in the US, Brazil and Canada.

Macquarie expects Brent and WTI prices to average at US$77 and US$73 a barrel in 2024.

Asia spot liquefied natural gas and Australia Newcastle coal futures tumbled more than 50% from last year's record highs, as demand from Europe eased while China and India ramped up coal output to prevent a repeat of last year's energy shock.

Mixed outlook for metals

A softer US dollar and Treasury yields amid growing expectations that the Federal Reserve will end its monetary policy tightening helped gold race towards its best year in three and saw prices scale all-time highs above US$2,100 this month.

Citi expects gold and silver prices to rise by mid-2024 on strong demand for the metals as a hedge against downside risks in developed market equities and property.

For industrial metals, nickel, down more than 40% in 2023, was the biggest loser, pressured by higher supplies in top producers Indonesia and China.

Prices are expected to remain under pressure in 2024 amid a global surplus for the metal used in stainless steel and electric vehicle batteries.

Softer-than-expected Chinese demand and US interest rate hikes weighed on prices, which recovered some ground in recent months due to supply disruptions by mine closures in Panama.

Source: Reuters

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Alex

Forex

The dollar is poised for its worst year since the onset of the pandemic, as Wall Street bets the Federal Reserve (Fed) is set to lower interest rates after reining in prices.

After being whipsawed by false starts calling for the end of the Fed's rate hiking regime, a Bloomberg gauge of the greenback is down nearly 3% this year in the steepest annual drop for the US currency since 2020.

Much of the decline materialised in the fourth quarter on growing wagers that the Fed will loosen policy next year as the US economy slows. That dents the dollar's appeal as other central banks may keep their rates higher for longer.

Swaps traders are now factoring in Fed rate cuts of at least 150 basis points, with the first coming as soon as March. That's up from less than 100 basis points in mid-November, and double what policymakers pencilled in at their most recent meeting. Among speculative traders, dollar positioning has become all the more bearish since the Fed's December meeting.

"Markets are positioned for this 'Goldilocks' scenario, where the Fed will cut rates enough to stimulate the economy without reigniting inflation pressures," said Amanda Sundstrom, a fixed income and foreign-exchange strategist at SEB AB in Stockholm. "That's driving the dollar performance."

Sundstrom added that the softer dollar is likely to persist in 2024 as US data weakens, but not enough to spur a risk-off bid for haven assets such as the greenback.

Still, the dollar's recent losses suggest there's room for at least a temporary rebound. The Bloomberg Dollar Spot Index's 14-day relative strength index recently fell below 30, a signal to some that the currency is now oversold and primed for a reversal.

Looking out further, the dollar may move in the lead-up to the US presidential election in November, according to Koji Fukaya, a fellow at Market Risk Advisory Co in Tokyo. In particular, Donald Trump's presence as a candidate could cause political turmoil, and inject volatility into the currency, he said.

Rate divergence

The dollar's decline stands in contrast to the pound, which is set for its best year since 2017, and the franc, on pace for its strongest annual performance since 2010.

Sterling has rallied more than 5% against the dollar so far in 2023, the biggest gain since the UK currency strengthened 9.5% in 2017. In Switzerland, the franc has risen to record, trade-weighted highs, as traders increasingly see the Swiss National Bank (SNB) holding policy tighter relative to its counterparts, even after a relatively dovish SNB meeting on Dec 14. Dollar Set for Worst Year Since 2020_3

"If I had to pick a central bank most likely to intervene to push down their currency next year, it would be the SNB," said Geoffrey Yu, a currency and macro strategist at BNY Mellon in London. As for the pound, "I won't chase it aggressively until we get clarity from the Bank of England", he said.

Source: Bloomberg

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Samantha Luan

Forex

Economic

Trading activity is rather subdued in the last Asian session of the year. With no major economic events on the calendar for the day, trading is expected to remain quiet. Dollar is making an attempt to recover but continues to be the weakest performer for the week. It is followed by Euro and Sterling in terms of weak performance. Conversely, Swiss Franc and Japanese Yen are standing out as the strongest currencies. Australian Dollar and New Zealand Dollar are showing slight strength, while Canadian Dollar is leaning towards the weaker side.

From a technical analysis perspective, a key focus as we enter 2024 is the trajectory of Bitcoin. The primary question is whether Bitcoin will resume its medium-term upward trend towards 50k handle. Consolidation from 44,727 appears to be near completion. Break of 44727 will target 161.8% projection of 15452 to 31815 from 24896 at 51371. However, break of 40145 support will dampen this immediate bullish view, and bring deeper correction first.

End-of-Year Forex Market Lull; Bitcoin's Prospects for Resurgence in 2024 Under Watch_1

In Asia, Nikkei closed down -0.51%. Hong Kong HSI is down -0.04%. China Shanghai SSE is up 0.48%. Singapore Strait Times is up 0.92%. Japan 10-year JGB yield rose 0.0234 at 0.616. Overnight, DOW rose 0.14%. S&P 500 rose 0.04%. NASDAQ fell -0.03%. 10-year yield rose 0.061 to 3.850.

Dollar marks December as worst performer, market foresees 88% chance of March Fed rate cut

As December 2023 concludes, Dollar is set to be the month's weakest performer. The persistent selloff can be largely attributed to Fed's signal of the possibility of implementing rate cuts totaling 75 basis points in the coming year, as seen in latest economic projections. This unexpected pivot towards more accommodative monetary policy had a ripple effect across financial markets, notably propelling DOW to record highs and bringing S&P 500 close to its peak levels.

The market's response to Fed's policy shift has been markedly aggressive. Traders have priced in an 88% probability of a 25bps cut as soon as March. Looking ahead to the entirety of 2024, there's a strong consensus, with over an 80% chance, that federal funds rate could decrease to a range of 3.75-4.00%, a notable drop from the current rate of 5.25-5.50%. The underlying rationale for such aggressive market expectations centers around the anticipation of recession in the US next year, a scenario that some analysts believe is increasingly likely.

End-of-Year Forex Market Lull; Bitcoin's Prospects for Resurgence in 2024 Under Watch_2

However, it is important to note that Fed is not alone. ECB and BoE are also expected by the markets to commence rate cuts at some point in the next year. Officials from both these institutions continue to resist these market expectations, but their efforts have fallen into deaf ears. Sterling and Euro have emerged as the second and third weakest currencies, respectively, for December. End-of-Year Forex Market Lull; Bitcoin's Prospects for Resurgence in 2024 Under Watch_3

End-of-Year Forex Market Lull; Bitcoin's Prospects for Resurgence in 2024 Under Watch_3

Yen dominates December as best performer on BoJ expectations

Japanese Yen is poised to be December's best performer in the currency markets. Its strength is primarily driven by growing expectations that BoJ will eventually exit its long-standing negative interest rate policy in 2024. Yen's performance is particularly noteworthy against Dollar (USD/JPY) and Sterling (GBP/JPY), both of which are top movers for the month, with the possibility of ending down more than 700 pips.

End-of-Year Forex Market Lull; Bitcoin's Prospects for Resurgence in 2024 Under Watch_4

The strengthening of Yen comes amidst a broader context where other major global central banks, such as Fed, ECB, and BoE, are expected to start loosening their monetary policies or, in some cases like SNB, BoC and RBNZ, maintain unchanged rates.

BoJ Governor Kazuo Ueda has recently softened his typically dovish tone, acknowledging that the likelihood of a rate hike in 2024 is "not zero." He also emphasized the importance of the Spring wage negotiations and the need for wage hikes to "broaden" from large companies to small businesses. This change in stance has contributed further to Yen's rally, with April being viewed as a probable timing for rate hike. Yen could see further gains if incoming information in Q1 solidifies this expectation.

Technically, USD/JPY's fall from 151.89 is seen as the third leg of the consolidation pattern from 151.93. Further decline is expected as long as 144.94 resistance holds. Next target is 61.8% retracement of 127.20 to 151.89 at 136.63, sustained break there will pave the way to 127.20 support (2022 low). End-of-Year Forex Market Lull; Bitcoin's Prospects for Resurgence in 2024 Under Watch_5

End-of-Year Forex Market Lull; Bitcoin's Prospects for Resurgence in 2024 Under Watch_5

At the same time, USD/CNH is undergoing similar development. The pair is having a second attempt to break through 38.2% retracement of 6.6971 to 7.3679 at 7.1117. Sustained trading below this level will strengthen the case that fall from 7.3679 is the third leg of the consolidation pattern from 7.3745, aligning with the outlook of USD/JPY. In this case, deeper fall would be seen to 61.8% retracement at 6.9533, with prospect of having a take on 6.6971 support. End-of-Year Forex Market Lull; Bitcoin's Prospects for Resurgence in 2024 Under Watch_6

End-of-Year Forex Market Lull; Bitcoin's Prospects for Resurgence in 2024 Under Watch_6

Looking ahead

Swiss KOF economic barometer and US Chicago PMI are the only features today.

AUD/USD Daily Report

AUD/USD continues to lose upside momentum ahead of 0.6894 resistance and intraday bias is turned neutral first. On the upside, decisive break of 0.6894 will extend the rally from 0.6269 towards 0.7156 key resistance next. On the downside, however, break of 0.6796 support will indicate short term topping, on bearish divergence condition in 4H MACD. Intraday bias will be turned back to the downside for pullback to 0.6689 resistance turned support. End-of-Year Forex Market Lull; Bitcoin's Prospects for Resurgence in 2024 Under Watch_7

End-of-Year Forex Market Lull; Bitcoin's Prospects for Resurgence in 2024 Under Watch_7

In the bigger picture, there is no confirmation that down trend from 0.8006 (2021 high) has completed. Price actions from 0.6169 (2022 low) could be just a medium term corrective pattern. Rise from 0.6269 is seen as the third leg of the pattern. For now, range trading should be seen between 0.6169 and 0.7156 (2023 high), until further developments. End-of-Year Forex Market Lull; Bitcoin's Prospects for Resurgence in 2024 Under Watch_8