The positive surprise just got less positive. The second estimate of German GDP growth in the third quarter showed that the economy only just avoided a summer recession. GDP growth came in at 0.1% quarter-on-quarter, from +0.2% QoQ in the first estimate. Given that the economy shrank by 0.3% QoQ in the second quarter, today's headline number shouldn't be taken as a sign of a rebound, but rather as a confirmation that the German economy is stuck in stagnation and is now hardly any larger than at the start of the pandemic more than four years ago. 

What is new today is the GDP components showing that private consumption and inventory build-up were the main drivers of the economy in the third quarter, while net exports and investments were a drag. The large contribution of inventory build up over the last two quarters in particular does not bode well for the next quarters as soon as inventory reduction takes place.

Winter recession looming

You have heard it before that the current state of the German economy is the result of both cyclical and structural headwinds. The pandemic and the war in Ukraine have accelerated the structural weakness but are not the core reasons for the current situation. In a world where China has become the "new Germany" – at least in manufacturing – Germany’s old macro business model of cheap energy and easily accessible large export markets is no longer working. The negative news flow of recent months with company restructurings, a still-growing number of insolvencies and even the collapse of the government illustrate the toll four years of stagnation can take.

Looking ahead, there is very little reason to expect any imminent change for the economy. In fact, the expected economic policies of the incoming US administration as well as continued policy uncertainty as a result of the German government’s collapse are likely to weigh on sentiment in Germany. Whether it’s the prospects of tariffs or US tax cuts and deregulation indirectly undermining German competitiveness, it’s hard to see how US economic policies will not be negative for the German economy.

On a more positive note, a new government could – emphasis on could, not will – finally end the current economic policy paralysis in Germany and provide the country with the long-awaited economic policy certainty and guidance on how to restore growth and competitiveness. The policy prescriptions of deregulation, lower taxes, reducing red tape and investments in infrastructure, digitalisation and education are all very well known. Implementing them without at least temporarily deviating from the fiscal debt brake currently looks like an almost impossible challenge.

Even if the German economy avoided a summer recession, a winter recession is looming. Looking beyond the winter, the German growth outlook will heavily depend on the new government's ability to strengthen the domestic economy amid a potential trade war and even stronger industrial policies in the US.

Swiss Franc and US Dollar appreciated broadly today as investors sought safe-haven assets in response to escalating geopolitical risks. Gold extended its near-term rebound, while Bitcoin surged to a new record high, reflecting heightened demand for alternative stores of value.

The catalyst for this shift was a warning from Russian President Vladimir Putin that the conflict in Ukraine is escalating toward a global scale. Putin stated that Russia responded to Ukraine’s use of US and British-supplied missiles by launching a new hypersonic medium-range ballistic missile at a Ukrainian military facility. He indicated that additional actions could follow, intensifying concerns about a broader confrontation involving major powers.

Despite these developments, the risk-off sentiment was not uniformly reflected across global markets. DOW closed significantly higher overnight, while NASDAQ edged lower. In Asia, market performance was mixed; Japan’s Nikkei 225 advanced whereas Hong Kong’s HSI and China’s SSE trade in red.

Australian Dollar pulled back slightly but remains one of the week’s strongest performers, despite mixed PMI data. Meanwhile, Yen continued to trade within familiar ranges, showing limited reaction to both the geopolitical developments and stronger-than-expected Japanese CPI data.

Attention is now turning to the Eurozone’s PMI data scheduled for release today. This data will be particularly significant after Euro’s broad-based decline yesterday, breaking key support levels against several major currencies.

Technically, EUR/CHF’s near term decline resumed and breaks through 0.9305 support. Attention is now on whether it picks up downside momentum for breaking through 0.9209 low decisively.

In Asia, at the time of writing, Nikkei is up 0.76%. Hong Kong HSI is down -1.70%. China Shanghai SSE is down -1.58%. Singapore Strait Times is up 0.07%. Japan 10-year JGB yield is down -0.0101 at 1.086. Overnight, DOW rose 1.06%. S&P 500 rose 0.53%. NASDAQ rose 0.03%. 10-year yield rose 0.026 to 4.432.

Japan’s CPI eases to 2.3% in Oct, core-core rises to 2.3%

Japan’s inflation data for October revealed persistent and broadening price pressures. Core CPI (excluding food) eased slightly to 2.3% yoy, down from 2.4% yoy but exceeding expectations of 2.2% yoy. This marked the 31st consecutive month core CPI has stayed at or above BoJ’s 2% target.

Core-core CPI (excluding food and energy) rose from 2.1% yoy to 2.3% yoy, underscoring renewed strength in underlying inflation. Headline CPI moderated from 2.5% to 2.3%, partly due to slowing energy price gains, which decelerated sharply to 2.3% yoy from 6.0% yoy in September. However, food prices surged 3.8% yoy, accelerating from 3.1% yoy, while services prices edged up to 1.5% yoy from 1.3% yoy.

The combination of steady inflation momentum, recovering consumer spending, and Ten’s renewed weakening bolsters the argument for a BoJ rate hike at its upcoming policy meeting in December.

Japan’s PMI manufacturing falls to 49.0, services rises to 50.2

Japan’s PMI Manufacturing index edged down to 49.0 from 49.2 in November, signaling a deepened contraction in the sector. In contrast, PMI Services rose slightly to 50.2 from 49.7, indicating a renewed, albeit modest, expansion. PMI Composite improved marginally but remained below the neutral mark at 49.8, up from 49.6.

Usama Bhatti, Economist at S&P Global Market Intelligence, noted that demand conditions were “stagnant,” while employment grew at the fastest rate in four months. Price pressures persisted across sectors, driven by rising raw material costs and Yen’s weakness. Firms responded with sharper increases in prices charged for goods and services, aiming to pass on these higher cost burdens to customers.

Australia’s PMI composite falls to 49.4, second contraction in three months

Australia’s PMI Manufacturing improved sharply from 47.3 to 49.3 in November, marking a six-month high but remaining in contraction territory. Conversely, PMI Services index dropped from 51.0 to 49.6, hitting a 10-month low and signaling contraction. PMI Composite fell from 50.2 to 49.4, its lowest level in 10 months, indicating a slight overall contraction in private sector output for the second time in three months.

Jingyi Pan, Economics Associate Director at S&P Global Market Intelligence, highlighted the significance of the services sector’s slowdown. “The November S&P Global Flash Australia PMI posted the lowest reading since January, bringing the fourth-quarter average thus far below that of the prior quarter,” Pan said.

The report also noted that easing capacity pressures and subdued activity contributed to slower employment growth, which fell further below the long-term average. In addition, selling price inflation eased as businesses showed caution in raising charges. This combination of softer employment growth and reduced price pressures supports expectations of lower interest rates.

Looking ahead

UK will release retail sales and PMI flash in European session. Germany will release GDP final. Eurozone will also release PMI flash. Later in the day, Canada will release retail sales. US will also release PMI flash.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.0439; (P) 1.0497; (R1) 1.0532; More…

EUR/USD’s fall from 1.1213 resumed by breaking through 1.0495 temporary low. Intraday bias is back on the downside for 1.0447 support and then 1.0404 key fibonacci level next. Strong support could be seen from this zone to bring rebound. But risk will stay on the downside as long as 1.0609 resistance holds. Decisive break of 1.0404 will carry larger bearish implications.

In the bigger picture, price actions from 1.1274 (2023 high) are seen as a consolidation pattern to up trend from 0.9534 (2022 low), with fall from 1.1213 as the third leg. Downside should be contained by 50% retracement of 0.9534 (2022 low) to 1.1274 at 1.0404, to bring up trend resumption at a later stage. However, firm break of 1.0404 will raise the chance of reversal and target 61.8% retracement at 1.0199.

Source: ACTIONFOREX

GEORGE TOWN (Nov 22): Frequent water supply disruptions, high industrial land prices and talent shortages are among challenges faced by the Penang government in its effort to position the state as the Silicon Valley of the East.

Chief Minister Chow Kon Yeow said that challenges for the digital economy sector include the lack of Grade A office spaces or MSC Cybercentre buildings capable of meeting high investor demand, as well as competition from other states and countries in offering attractive incentives.

“Nevertheless, the state government, in collaboration with the federal government and relevant agencies, is working to address these challenges effectively.

“This is to ensure that Penang is the top choice for local and international investors,” he said at the state assembly sitting on Friday.

Chow was responding to a question from Lee Khai Loon (PH-Machang Bubuk), who wanted to know the state government’s efforts to establish Penang as the Silicon Valley of the East.

Chow also said that the state government is actively strengthening its ties with the headquarters of corporate investors, including in the United States (US), which have chosen Penang as their investment location.

The chief minister further said that during his recent investment mission to the US, he had visited companies such as Agilent Technologies, AMD Inc, Brooks Instrument, Centific, Coherent Inc, Cohu Inc, Dexcom Inc and TTM Technologies.

He explained that the state delegation’s visit to these companies aimed to promote Penang as the prime investment destination for the electrical and electronic, semiconductor, medical devices, GBS and other sectors.

“A strong industry and ecosystem are key factors in attracting foreign direct and domestic investments to Penang,” he said.

Source: Theedgemarkets

TOKYO (Nov 22): Japan is set to kick off discussions on raising the basic tax-free income allowance in effective permanent tax cuts worth up to US$51 billion (RM227.86 billion), a step that could also help ease constraints on part-time workers amid intensifying labour shortages.

The government's plan, which will be mentioned in an economic stimulus package to be announced on Friday, comes as the ruling coalition yielded to a push by a key opposition party whose cooperation is crucial for the coalition to stay in power.

If the income tax threshold is lifted from the current ¥1.03 million (US$6,674 or RM28,856) per year to ¥1.78 million as demanded by the opposition Democratic Party for the People (DPP), tax revenue would drop by ¥7 trillion (US$45.36 billion) to ¥8 trillion, according to a government estimate.

While the new threshold level has yet to be discussed, policymakers say a full increase to ¥1.78 million is unlikely.

DPP argues that ¥1.03 million has also served as constraining student part-time workers as their parents lose a tax deduction treatment if their dependent minors earn beyond the level.

Daiwa Research Institute estimates that about 610,000 students currently voluntarily limit their working hours to avoid hitting the threshold.

An increase in the deduction threshold to ¥1.8 million would boost labour supply by about 330 million hours, workers' compensation by ¥456 billion and increase private consumption by ¥319 billion, according to Daiwa estimates.

But critics are sceptical about the impact on labour supply, pointing out that there are other barriers that prevent from such workers from working longer.

Raising the income tax threshold would also keep Japan an outlier among advanced nations that had mostly phased out pandemic-mode stimulus.

"This is effectively a dole-out policy disguised as a labour issue," said Saisuke Sakai, senior economist at Mizuho Research and Technologies.

"Japan's goal of running a primary budget surplus in the next fiscal year would be absolutely impossible. With no one caring about the fiscal discipline, concerns about Japan's debt could intensify among investors," he added.

In the stimulus package to be approved later on Friday, the government will spend ¥13.9 trillion from its general account to fund measures aimed at mitigating the impact of rising prices on households.

The focus will now shift to how to fund the budget.

JPMorgan said in a report to clients that it expects about ¥10 trillion in additional new government bonds for the latest package.

However, the outlook for the budget for the next fiscal year from April is growing unclear as the outcome of the discussions on the tax revision would impact tax revenue for the year.

Fixing tattered public finances has emerged as a more imminent task for Japan as its central bank moves to exit years of ultra-easy monetary policy that had kept borrowing costs ultra low.

Japan's public debt stands at more than twice the size of its economy, by far the biggest among industrialised economies.

Source: Theedgemarkets

The USD/CAD pair edges higher during the Asian session on Friday, albeit it lacks follow-through buying and remains below the 1.4000 psychological mark amid mixed cues. 

Hotter Canadian CPI print on Tuesday forced investors to scale back their bets for a big rate cut by the Bank of Canada (BoC) in December. Apart from this, this week's goodish recovery in Crude Oil prices, from over a two-month low touched on Monday, underpins the commodity-linked Loonie and acts as a headwind for the USD/CAD pair. The downside, however, remains cushioned on the back of a strong bullish sentiment surrounding the US Dollar (USD), which continues to draw support from bets for a less dovish Federal Reserve (Fed).

From a technical perspective, the USD/CAD pair showed some resilience below the 100-period Simple Moving Average (SMA) on the 4-hour chart. The subsequent uptick, along with positive oscillators on the daily chart, suggests that the path of least resistance for spot prices is to the downside. That said, the lack of any meaningful buying interest warrants some caution before confirming that the recent pullback from the 1.4100 mark, or the highest level since May 2020 has run its course and positioning for any further appreciating move.

Meanwhile, the 100-period SMA on the 4-hour chart, currently pegged around mid-1.3900s, and the overnight swing low, near the 1.3930 area, now seems to protect the immediate downside ahead of the 1.3900 mark. A convincing break below the latter could be seen as a fresh trigger for bearish traders and accelerate the fall towards the 1.3860-1.3855 intermediate support en route to the monthly low, around the 1.3820-1.3815 region. This is closely followed by the 1.3800 round figure, which if broken decisively will set the stage for deeper losses. 

On the flip side, sustained strength and acceptance above the 1.4000 psychological mark will be seen as a key trigger for bullish traders. The subsequent move-up should allow the USD/CAD pair to surpass the weekly top high, around the 1.4035 area, and aim to conquer the 1.4100 round figure. The move up could extend further towards the 1.4170 area en route to the 1.4200 mark, mid-1.4200s, the 1.4300 round figure and the 1.4340 supply zone.

USD/CAD 4-hour chart

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.

How do the decisions of the Bank of Canada impact the Canadian Dollar?

The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.

How does the price of Oil impact the Canadian Dollar?

The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.

How does inflation data impact the value of the Canadian Dollar?

While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.

How does economic data influence the value of the Canadian Dollar?

Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.

Source: FXSTREET

Euro Faces Challenges Amid Trade Tensions and Weak Growth