AUDUSD: Bearish sentiment starts in 2024

Australia’s economy demonstrated a mixed performance this year. The RBA maintained the cash rate at 4.35% to combat persistent underlying inflation, which remained around 3.5%. Economic growth was sluggish, with GDP increasing by only 0.8% over the year. The labor market showed resilience, with the unemployment rate at 4.1% in October. The Australian dollar fluctuated due to global economic uncertainties and domestic policy decisions. In 2025, the economic outlook is cautiously optimistic. The RBA is expected to gradually reduce the cash rate as inflationary pressures ease, aiming for the 2-3% target range by mid-to-late 2025. GDP growth is projected to improve but remain below trend, supported by government spending and a recovery in household consumption. The labor market is anticipated to stabilize, with unemployment rates potentially rising slightly as demand and supply balance out.

AUDUSD has lost around 5% during 2024, but from a technical standpoint, the pair is down more than 8% following the significant pullback from the 20-month high of 0.6940. The commodity currency dived toward a fresh 13-month low at 0.6340, holding beneath the long-term ascending trend line. In 2025, the price might see further descending movements with immediate support levels coming from 0.6270 and 0.6170. However, a potential upside retracement may send traders to the 0.6440 barrier, which holds above the uptrend line ahead of the 50- and 100-week SMAs around 0.6600. Technical oscillators are endorsing the negative scenario.

NZDUSD: Is it time to exit from the trading range?

In 2024, New Zealand’s economy faced significant challenges. The RBNZ reduced the official cash rate to 4.25% to stimulate economic activity amid weak performance and rising unemployment. Inflation fell to 2.2%, within the RBNZ’s target range, but domestic prices, especially for services, remained high. Despite signs of recovery, the outlook remained cautious with expectations of further interest rate cuts. Looking ahead to 2025, the RBNZ aims to keep inflation within the 1-3% range, with the OCR potentially dropping to 3.3%. GDP growth is forecasted at 2.1%, with unemployment around 5.2%. Wage growth is expected to be moderate at 2.8%.

NZDUSD has been in a consolidation area since January 2023 with the upper boundary at the 0.6380 resistance level and the lower boundary at the 0.5770 support. Currently, the market is facing a real struggle near the aforementioned support, recording a new 26-month low of 0.5752. More steeper decreases could open the way for the next round numbers, such as 0.5700 and 0.5600, before meeting the bottom from October 2022 at 0.5510. Alternatively, a higher move could support the trading range once more, with the resistance line located within the 0.6040-0.6100 area, which encompasses the 50- and 100-day simple moving averages (SMAs). Momentum oscillators are mirroring the descending movement.

USDCAD: In new highs before 2025

Canada’s economy faced several challenges during the year. The BoC reduced the policy rate to 3.75% by October to counteract weak economic growth and rising unemployment. Inflation fell to around 2%, aligning with the BoC’s target range, but the distribution of inflation rates across different components remained uneven. The Canadian dollar experienced volatility, influenced by global economic conditions and domestic policy decisions. Despite these efforts, economic growth was sluggish, with GDP growth remaining modest. 2025’s economic outlook is cautiously optimistic.  The BoC is expected to continue reducing interest rates as inflationary pressures ease, aiming to support economic activity. GDP growth is projected to improve gradually, supported by stronger consumer spending and business investment. The labor market is anticipated to stabilize, although unemployment may remain slightly elevated.

USDCAD has been creating an intriguing bullish rally lately, sending the market to a fresh four-and-a-half-year high of 1.4244, following the strong bounce off 1.3420. The next resistance line traders should keep in mind is the April 2020 peak at 1.4265.  Even higher, the March 2020 peak at 1.4680 looks to be a critical level, but first the bulls need to overcome the psychological marks of 1.4300, 1.4400, and 1.4500. On the downside, immediate support could come from 1.3945, ahead of the 50-day SMA at 1.3675 and the 1.3640 barricade.  The technical oscillators are showing some mixed signals, with the RSI indicating an overstretched market and the MACD still extending its bullish momentum.

(Dec 17): Chinese leaders agreed last week to raise the budget deficit to 4% of gross domestic product (GDP) next year, its highest on record, while maintaining an economic growth target of around 5%, two sources with knowledge of the matter said.

The new deficit plan compares with an initial target of 3% of GDP for 2024, and is in line with a "more proactive" fiscal policy outlined by leading officials after December's Politburo meeting and last week's Central Economic Work Conference (CEWC), where the targets were agreed but not officially announced.

The additional one percentage point of GDP in spending amounts to about 1.3 trillion yuan (US$179.4 billion or RM793.58 billion). More stimulus will be funded through issuing off-budget special bonds, said the two sources, who requested anonymity as they were not authorised to speak to the media.

These targets are usually not announced officially until an annual parliament meeting in March. They could still change before the legislative session.

The State Council Information Office, which handles media queries on behalf of the government, and the finance ministry did not immediately respond to a Reuters request for comment.

The stronger fiscal impulse planned for next year forms part of China's preparations to counter the impact of an expected increase in US tariffs on Chinese imports as Donald Trump returns to the White House in January.

The two sources said China will maintain an unchanged GDP growth target of around 5% in 2025.

A state media summary of the closed-door CEWC said it was "necessary to maintain steady economic growth", raise the fiscal deficit ratio and issue more government debt next year, but did not mention specific numbers.

Reuters reported last month that government advisers had recommended Beijing not to lower its growth target.

The world's second-largest economy has stuttered this year due to a severe property crisis, high local government debt and weak consumer demand. Exports, one of the few bright spots, could soon face US tariffs in excess of 60% if Trump delivers on his campaign pledges.

The US President-elect's threats have rattled China's industrial complex, which sells goods worth more than US$400 billion annually to the US. Many manufacturers have been shifting production abroad to escape tariffs.

Exporters say the levies will further shrink profits, hurting jobs, investment and economic growth in the process. They would also exacerbate China's industrial overcapacity and deflationary pressures, analysts said.

The summaries of the CEWC and the Politburo meetings also flagged that China's central bank would switch to an "appropriately loose" monetary policy stance, raising expectations of more interest rate cuts and liquidity injections.

The previous "prudent" stance that the central bank had held for the past 14 years coincided with overall debt — including that of the government, households and companies — jumping more than five times. The economy expanded roughly three times over the same period.

China is likely to rely heavily on fiscal stimulus next year, analysts say, but could also use other tools to cushion the impact of tariffs.

Reuters reported last week, citing sources, that China's top leaders and policymakers are considering allowing the yuan to weaken next year to mitigate the impact of punitive trade measures.

The CEWC summary kept a pledge to "maintain the basic stability of the exchange rate at a reasonable and balanced level". Readouts from 2022 and 2023 also included this line.

Source: Theedgemarkets

(Dec 17): Japan’s government plans to decisively back the expansion of nuclear power, dropping a decade-long policy of reducing dependence on the energy source and reversing curbs initiated following the 2011 Fukushima meltdown.

The nation, which relied on coal and natural gas for more than 60% of electricity generation last year, set out a proposed new energy strategy on Tuesday, which urges both nuclear and renewables to be utilised “to the fullest extent” to maintain growth and help curb emissions. The draft policy, which is expected to be adopted, also recommends the construction of entirely new reactors.

Nuclear should account for around 20% of the nation’s energy mix by fiscal 2040 and renewables for around 40% to 50%, according to the strategy, drafted by the trade ministry and advised by a 16-person panel of experts. Renewables accounted for about 23% of the power mix in fiscal 2023 and nuclear made up roughly 8.5%, according to the latest trade ministry data.

Nations globally are driving a nuclear power renaissance as governments and power-hungry industries seek to bolster energy security by limiting dependence on fuel imports and securing a reliable supply of emissions-free power.

Adding more emissions-free power is seen as crucial to allow Japan to attract more data centre operators and advanced manufacturing like semiconductor factories. Alphabet Inc’s Google and Nvidia Corp-backed cloud services firm Ubitus K K have both flagged an interest in using nuclear power in the nation, while companies including Microsoft Corp have invested in building local solar plants.

The revised energy strategy should also enable Japan, the fifth-largest carbon dioxide polluter, to boost decarbonisation efforts that have been criticised by scientists and climate groups as insufficient. Japan is currently considering a new target to cut emissions by 60% by 2035 from 2013 levels, though that remains less ambitious than countries like the UK.

Nuclear previously accounted for roughly a third of Japan’s power mix, and all 54 of the nation’s reactors were taken offline following the 2011 disaster at the Fukushima Dai-ichi power plant. Of 33 still operable reactors, only 14 are so far back online. A policy first introduced in 2014 had called on the nation to reduce its dependence on nuclear power.

Japan should consider replacing decommissioned plants with new, advanced reactors, the advisory panel recommended. Still, boosting nuclear output is likely to be challenging, as stringent regulations remain in place following the Fukushima disaster. Utilities must also go through a lengthy process to win public consent and other approvals.

Fossil fuels are seen accounting for 30% to 40% of Japan’s power mix by 2040, according to the panel, compared to 69% in fiscal 2023. The strategy highlighted a continued importance of coal and liquefied natural gas and called for the government to continue to develop resources at home and overseas.

Overall, Japan’s annual power demand is also expected to reverse recent declines, driven by rising electrification and demands from AI. Total power generation is seen rising to as much as 1,200 terawatt hours a year in 2040, up 20% from 2023.

Source: Theedgemarkets

WHERE WE STAND

LOOK AHEAD

The Japanese Yen (JPY) remains on the back foot against its American counterpart during the Asian session on Tuesday amid the growing conviction that the Bank of Japan (BoJ) is likely to keep interest rates unchanged this week. Furthermore, the recent surge in the US Treasury bond yields, bolstered by expectations for a hawkish interest rate cut by the Federal Reserve (Fed), is seen as another factor weighing on the lower-yielding JPY. 

Apart from this, a generally positive risk tone undermines demand for the safe-haven JPY, though a modest US Dollar (USD) downtick caps the upside for the USD/JPY pair. Traders also seem reluctant to place aggressive directional bets and might opt to move to the sidelines ahead of this week's key central bank event risks. The US central bank is scheduled to announce its policy decision on Wednesday, followed by the BoJ on Thursday. 

Japanese Yen bears retain control amid expectations that the BoJ will maintain the status quo

Expectations that the Bank of Japan will keep interest rates unchanged at the end of a two-day meeting on Thursday continue to undermine the Japanese Yen and lift the USD/JPY pair to a three-week high on Monday.

Japan's economy minister, Ryosei Akazawa said this Tuesday that the BoJ and the government will work together to conduct appropriate monetary policy and that the central bank should handle the specifics of monetary policy.

The yield on the benchmark 10-year US government bond rose to its highest level since November 22 in reaction to data showing that a big part of the US economy expanded at the fastest pace in more than three years.

The S&P Global flash US Services Purchase Managers Index (PMI) rose from 56.1 to 58.5 in December – the highest level in 38 months – and the Composite PMI surged from 54.9 in November to 56.6, or a 33-month high.

This overshadowed a fall in the flash US Manufacturing PMI to a three-month low of 48.3 in December and reaffirmed market bets that the Federal Reserve will likely signal a slower pace of policy easing going forward. 

According to the CME Group's FedWatch Tool, markets have fully priced in that the Fed will deliver a 25-basis-points rate cut on Wednesday, which keeps the US Dollar bulls on the defensive and caps the USD/JPY pair.

Traders now look forward to the release of the US monthly Retail Sales data, which, along with the US bond yields, will drive the USD demand and produce short-term opportunities around the currency pair. 

The focus, however, will remain glued to the outcome of the highly-anticipated FOMC meeting on Wednesday and the crucial BoJ decision on Thursday, which should provide a fresh directional impetus to the JPY. 

USD/JPY seems poised to reclaim the 155.00 psychological mark while above the 61.8% Fibo. level

From a technical perspective, Monday's breakout through the 61.8% Fibonacci retracement level of the November-December fall from a multi-month peak and acceptance above the 154.00 round figure could be seen as a key trigger for bulls. Moreover, oscillators on the daily chart have just started gaining positive traction and support prospects for a further appreciation for the USD/JPY pair. Hence, some follow-through buying beyond the overnight swing high, around the 154.45-154.50 area, should pave the way for a move towards reclaiming the 155.00 psychological mark. The momentum could extend further towards the next relevant hurdle near mid-155.00s en route to the 156.00 mark and the 156.25 resistance zone. 

On the flip side, the 61.8% Fibo. resistance breakpoint, around the 153.65 area, now seems to protect the immediate downside ahead of the overnight low, around the 153.35 region. This is closely followed by the 153.00 mark, below which the USD/JPY pair could accelerate the fall towards the very important 200-day Simple Moving Average (SMA) pivotal support near the 152.10-152.00 region. A convincing break below the latter might shift the bias in favor of bearish traders and drag spot prices to the 151.00 round figure en route to the 150.00 psychological mark

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.

Source: FXSTREET

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