USD: Sticky inflation to keep market guessing over Fed rate cuts

The dollar remained reasonably bid on Tuesday as markets digested the US tariff news, while news of a peace deal between Israel and Hezbollah has not affected the market much. Apart from the understandable pressure on the Mexican peso and US car producers with facilities south of the border, there was little impact on the US rates markets. In other words, the inflationary side of potential tariffs has yet to play out in US asset markets.

On the subject of inflation, today sees the release of the core PCE deflator for October. The 0.3% month-on-month reading may still be a little too high for the Fed's liking, although such a number is fully discounted today. That means the market probably retains its pricing of 15bp worth of Fed cuts in December and also keeps US rate differentials versus the Rest of the World at reasonably wide levels.

We are bullish on the dollar and note that today's US data set, including confirmation of US third-quarter GDP at 2.8% quarter-on-quarter annualised, will be the last in this holiday-shortened week. In its entirety, the environment looks dollar-bullish to us. The main downside risk to the dollar this week probably comes from month-end rebalancing flows. Here the huge divergence for dollar-based equity investors of S&P 500 +5.3% month-to-date versus -1.36% for the Eurostoxx 50 or -1.6% for the Nikkei 225 warns of rebalancing dollar sales to raise European and Japanese equity weightings back to benchmarks. These flows could be going through poor liquidity conditions later this week, but any DXY dip to the 106.25/50 area this week should meet good demand.

EUR: Little reason to be cheerful

EUR/USD struggled to rally yesterday despite some US macro data which was not as strong as it could be. Holding the euro back was probably the fallout on the European auto sector yesterday as it reacted to the prospect of Trump following through on his pre-election threats. German car maker equity prices were off 3-6% yesterday.

There is not a lot on the eurozone calendar today and the best chance of a EUR/USD move will be on the back of the US inflation data. EUR/USD still looks quite oversold based on its 6-7% two-month drop, which suggests any dip towards the 1.0400/0425 area today could be enough of a decline before any potential month-end rebalancing dollar sales emerge (discussed above).

GBP: Innocent bystander

With one-week deposit rates at 4.75% and the highest in the G10 space, sterling may be deriving some inflows as the market makes up its mind about the speed and magnitude of Trump's policy agenda. Additionally, the Bank of England rate profile continues to get traded closer to the Fed than the ECB and suggests sterling should outperform against the euro. We have a year-end EUR/GBP at 0.83 – not too far from current levels.

However, the risk to that forecast probably lies more to 0.82 than 0.84 since the UK is less exposed on the trade side and the BoE has yet to abandon its concern over late-cycle inflation. The BoE's Chief Economist, Huw Pill, was the latest MPC member yesterday to cite the ongoing focus on service inflation.

CEE: Focus on bond auctions again

Retail and industrial data for October surprised positively in Poland, and today, except for the labour market data, we will have a break in the calendar in the CEE region. However, the focus will shift to government bond auctions in Poland and the Czech Republic. In Poland, the Ministry of Finance has been struggling with low demand for the last few auctions, while the monthly supply of Polish government bonds remains elevated at around PLN25bn due to budget revisions and the plan for next year. Although this year's borrowing needs are essentially covered according to our calculations, the Ministry of Finance is trying to pre-finance as much as possible for next year, while this year's state budget may still show some holes at the end of the year when spending is traditionally the highest. Overall, the market will be watching demand in today's auction and interest in duration, which has been highly volatile in recent weeks.  

On the other hand, in the Czech Republic, the Ministry of Finance is still enjoying decent demand despite the higher supply of Czech government bonds (CZGB) in the last three months due to expected flood damage spending. Today, the Ministry of Finance will also issue a EUR-denominated CZGB for the first time in a long time, and we should be able to estimate the remaining CZGB issuance in December based on the success of today's auction. However, the state budget suggests that spending is rather lower than expected and we may see a significantly lower supply of CZGBs in December while CZK40bn will be due, suggesting a positive end to the year. 

In both the Polish zloty and Czech koruna markets, we can expect the usual paying flow in rates coming from hedging for bond auctions. This could support FX, which was already looking for some gains again yesterday with a pause in the USD rally and some repricing of rates in both markets. We still remain bearish on CEE currencies in general due to our EUR/USD view, and thus see the current stronger PLN and CZK as an opportunity for the market to build new short positions rather than a turnaround story.

Energy – Israel and Hezbollah announce ceasefire

ICE Brent has been trading flat after a sharp fall on Monday as the market assesses the Middle East's new dynamics. Israel and Hezbollah have announced a 60-day ceasefire agreement, effective immediately. This time window could be used to discuss a longer-lasting peace agreement. The focus now shifts to the implementation of the current agreement and how it affects ongoing fighting in the Gaza Strip or the Israel-Iran conflict.

Weekly data from the American Petroleum Institute (API) shows that crude oil inventory in the US dropped by 5.9m barrels over the last week compared to market expectations of a marginal draw. For refined products, distillate and gasoline stocks increased by 2.5m barrels and 1.8m barrels respectively. The more widely followed EIA report will be released today.

OPEC+ is scheduled to meet this weekend and expectations are that the group could further delay its plans to increase production by 180k bbls/d in January. In the last meeting, the group had postponed its supply increment plans from December to January. Crude oil prices continue to face stiff resistance around US$75/bbl due to demand concerns. Any premature production hike from the group could push the market into deeper oversupply.

Metals – LME zinc cancelled warrants increase

Latest LME data shows that cancelled warrants for zinc rose by 47,800 tonnes (the biggest daily addition since 27 August 2015) to 57,350 tonnes as of yesterday, the highest since 21 March 2024. The majority of the cancellations were reported in Singapore warehouses. Cancelled warrants now account for around 22% of LME zinc stocks and hints of a continued withdrawal of warehouse stocks over the coming weeks. LME zinc stocks have already dropped by around 12.7kt since last Wednesday.

In its latest update, the World Platinum Investment Council (WPIC) forecasts the global platinum market deficit to narrow to 682koz in 2024 following an improved supply outlook and lower industrial demand. This compares to a previous estimate of a supply deficit of 1.03moz for the current year. Meanwhile, the market could face a third consecutive deficit of 539koz in 2025, amid lower supply and increased automotive demand (to the highest level since 2017). The global platinum market saw a supply deficit of 759koz in 2023. WPIC estimates that platinum consumption could rise by 0.4% YoY to 7.95moz in 2024, while global supply could increase by 1.5% YoY to 7.27moz. For 2025, the council estimates demand to drop by around 1.1% YoY mainly due to lower demand from the glass industry. On the other hand, supply could increase by around 0.8% YoY due to higher recycling.

The latest LME COTR report released yesterday shows that speculators decreased bullish bets in copper, aluminium and zinc last week. Speculators reduced net long positions in copper by 506 lots to 57,892 lots for the week ending 22 November. This is the lowest since the week ending 19 January 2024. Similarly, net bullish bets for aluminium fell by 4,960 lots for a fourth consecutive week to 116,499 lots at the end of last week, the lowest since the week ending on 11 October 2024. Meanwhile, money managers decreased net bullish bets for zinc by 769 lots for a fourth straight week to 26,303 lots (the lowest since the week ending 6 September 2024) as of last Friday.    

Agriculture – European wheat exports remain soft

Weekly data from the European Commission shows that EU soft-wheat exports for the 2024/25 season dropped to 9.2mt as of 24 November, down 30% YoY. Rising competition from Russia and a poor harvest in France have weighed on export volumes. Meanwhile, EU corn imports increased by 7% YoY to 7.9mt mainly due to weaker domestic supply this season.

Thailand’s Cane and Sugar Board reports that the country could start the sugar crush season on 6 Dec this year. Heavy rainfall this year had increased the risks of a delay to the crushing season; however, the impact on the crop/plants is not as severe as feared. The Board estimates that sugar cane crushing could increase by around 13% YoY to 93.2mt in 2024/25 with sugar production to increase around 18% YoY to 10.4mt.

The NZD/USD pair builds on the overnight bounce from sub-0.5800 levels, or a fresh year-to-date low and gains strong positive traction on Wednesday after the Reserve Bank of New Zealand (RBNZ) announced its policy decision. The intraday move up remains uninterrupted through the first half of the European session and lifts spot prices to the 0.5900 mark, or a one-week high in the last hour. 

As was widely anticipated, the RBNZ lowered the Official Cash Rate (OCR) by 50 basis points (bps), from 4.75% to 4.25% at the conclusion of the November policy meeting. In the post-meeting press conference, RBNZ Governor Adrian Orr said there had been little discussion on cutting rates by anything other than 50 bps. This might have disappointed some investors anticipating a more aggressive easing, which, in turn, boosts the New Zealand Dollar (NZD) and prompts aggressive intraday short-covering around the NZD/USD pair. 

Meanwhile, expectations that Scott Bessent – US President-elect Donald Trump's US Treasury secretary nominee – will restrain budget deficits drag the benchmark 10-year US Treasury yields to a fresh multi-week low. This, along with the optimism over a ceasefire deal between Israel and Hezbollah, keeps the safe-haven US Dollar (USD) depressed near the weekly low, which offers additional support to the NZD/USD pair. That said, concerns that Trump's tariff plans will trigger trade wars might cap gains for the risk-sensitive Kiwi. 

Traders might also opt to wait on the sidelines and look to the crucial US inflation data for cues about the Fed's rate-cut path, which, in turn, will drive the USD demand and provide a fresh impetus to the NZD/USD pair. Hence, the focus will remain glued to the US Personal Consumption Expenditure (PCE) Price Index data. In the meantime, the prelim (revised) US Q3 GDP print, along with US Durable Goods Orders, could influence the USD and produce short-term trading opportunities during the North American session.

Source: FXSTREET

The price of liquefied natural gas in Asia could surge to above $20 per million British thermal units this winter as supply tightens in Europe, Goldman Sachs has predicted.

“That's the near term dynamic, given this vulnerability of Europe, the lack of spare capacity, the loss of the residual Russian volumes currently going through Ukraine, and I should say, a colder than average start of the winter,” the co-head of global commodities at the bank, Samantha Dart, said as quoted by Reuters.

For the past two years, Europe has been lucky with milder than usual winters that led to lower than usual gas demand although the seasonal pick-up in demand did cause increases in LNG imports, tighter global markets, and higher prices then as well. Now, the European winter seems off to a regular start, which means low temperatures and significantly higher demand for electricity—and gas.

Earlier this year, gas prices in Europe spiked following a production outage at a Norwegian platform and geopolitical jitters about the Middle East. Prices normalized soon enough but they did highlight the precarious situation that Europe has put itself in with regard to energy security. A massive buildout of wind and solar capacity, which both tend to underperform consistently during the winter months has been the chosen path. This has only boosted reliance on imported gas, leading to still higher prices—and prices wars with Asia.

At the end of last week, the European gas benchmark, the Title Transfer Facility price, hit the highest in two years as winter began settling in and demand for heating jumped. LNG traders have already started diverting cargoes from their Asian destinations to send them to Europe, which is paying a premium. Per Argus data, at least 11 such cargoes have been diverted in the past few weeks. The price jump is only a matter of time.

Source: OILPRICE

Even though Donald Trump’s tariff threats on China, Mexico and Canada didn’t concern Europe, the feeling in Europe was far from being comfortable yesterday. The word tariff gives cold chills especially to the European carmakers that already found themselves in crossfire with China. As such, Stellantis lost more than 5% yesterday while Volkswagen tanked another 2.76%.

Overall, Germany and Slovakia are the most vulnerable countries to any additional tariffs in Europe, because half of Germany’s GDP comes from exports, and cars make up to around 15% of these exports. Slovakia, on the other hand, has the highest per-capita car production globally, with automotive exports forming a significant part of its economy. The economic curse seems unrelenting for Germany. The country didn’t have time to get itself out of the energy crisis that the trade dispute is about to hit. Funny enough, you wouldn’t guess that the German economy is suffering badly when looking at the DAX valuations. The index trades near ATH levels, when the underlying economic fundamentals are telling a different story.

In the US, the market mood was better. Trump’s tariff threat, the rising inflation expectations as a result of them, and the cautious approach for further rate cuts from the latest Federal Reserve (Fed) minutes were outweighed by ceasefire news from the Middle East: Israel and Hezbollah inked a 60-day ceasefire agreement. The S&P500 posted its 52nd record high this year, the Dow Jones also extended its rally to a fresh record. Not everyone was happy, though. GM for example tanked 9% as its supply chain’s heavy reliance on both sides of its borders will explode the production costs and weigh on its profits.

Elsewhere, the energy companies had a slow session as crude oil consolidated and extended losses below the $70pb level on ceasefire news. Note that the news that OPEC+ is considering delaying the oil production restart beyond January has certainly tamed the selling pressure. Key nations at OPEC said that the timing may not be right for pushing 180’000 more barrels in an oversupplied market. The IEA for example predicts an oil surplus of more than 1mbpd next year – mainly due to the faltering Chinese demand. And that number risks being higher with Trump’s ‘drill baby drill’ policy. OPEC will meet at the start of next month and should drop plans to provide more oil in the next few months. And the latter should help throw a floor under the oil selloff, but will hardly reverse the medium-term negative outlook. Only a significant jump in demand, ideally from China, could do that. As such, US crude will likely consolidate below the 50-DMA.

In the FX, the US dollar eased yesterday as investors priced out a part of the geopolitical risks, while appetite in gold remained intact. The US 2-year yield extended a retreat, as the probability of a 25bp cut from the Fed jumped to 65% in the aftermath of the meeting minutes. Today, the US will release a crowded set of data before the Thanksgiving break. On the menu, the weekly jobless claims, the latest GDP update, durable goods orders and the core PCE index – the Fed’s favourite gauge of inflation. Quickly, the US economy is expected to have grown by around 2.8% in Q3 – slightly down from 3% printed previously but sales are expected to print a strong 3% growth (but we already knew that). Price pressures, however, are expected to have tamed in Q3 – which is good news for the Fed doves and the rate cut expectations. Yet, the core PCE index probably ticked higher to 2.8% in October, from 2.7% printed a month earlier. And that’s not great news for the inflation’s trajectory. Even less so as Trump’s tax cuts and tariffs are expected to give a boost to prices in the coming months. As such, a relatively strong growth number and softening price pressures last quarter will be welcome, but strong sales growth and a potential uptick in core PCE demand caution. I still believe that cutting first and seeing what happens is not the best strategy when the economic data remains strong. But I am not the Fed head. If the inflation data doesn’t surprise to the upside, investors will continue to back another 25bp cut in December and the latter could lead to a downside correction in the US dollar, and a rebound in major counterparts.

Elsewhere, the kiwi rallied against the greenback today following a widely expected 50bp cut from the Reserve Bank of New Zealand (RBNZ). Today’s cut marked the second consecutive 50bp cut, bringing total rate reductions to 125bp in just over three months, making the RBNZ the most aggressive rate cutter of the year. But the RBNZ predicted that the average cash rate falling to 3.83% by the middle of next year, suggesting that the policymakers, there, will move to a more gradual rate-cutting path moving forward. The latter could open the door for dipbuying opportunities after the kiwi dropped to the lowest levels in more than a year against the greenback. For those who are not willing to take the risk of a further dollar appreciation, shorting the euro against kiwi could be an alternative play provided the rising odds for more aggressive European Central Bank (ECB) cuts under Trump.