USD: Rates, liquidity and geopolitics keep dollar supported

Yesterday's news of the brief imposition of martial law in South Korea came as a shock. Korean currency and asset markets play a significant role in the investment universe, where the Korean won is the 12th most traded currency in the world (BIS 2022) and its government bonds make up 9-10% of emerging market local currency bond indices. Indeed, Korea recently celebrated its inclusion into the FTSE Russell's World Government Bond Index. Global investors will therefore be closely monitoring developments in Korea over the coming days.

We were discussing this yesterday, but dollar strength is not entirely being led by the second coming of Donald Trump. A lame duck government in Germany and potentially France too today if a no-confidence vote is successful, plus this Korean news, will only add to confidence that the relatively high rates (USD one-week deposit rates at 4.6%) and liquidity make the dollar the most compelling currency in which to park cash balances right now. Yes, there is the risk that US macro data softens a little and can drag the dollar a little softer, but taking defensive positions in something like the Japanese yen (deposit rate at 0.11%) or Swiss franc (0.86%) can be expensive.  

In focus for the US today is ADP employment data (1415CET) and ISM Services (16CET). The ADP number has been discredited this year, but the ISM services number occasionally moves markets. There seems no reason to see a sharp fall here and actually the JOLTS job opening data we discussed yesterday came in better than expected. 

Perhaps more interesting today will be Fed communication. Fed Chair Jerome Powell speaks in a moderated New York Times discussion at 1940CET. And the Fed's Beige Book is released at 2000CET. Both can provide a little colour ahead of the FOMC meeting on 18 December, where the Fed looks minded to ease policy. A 25bp cut is not fully priced and softer short-dated US rates could drag the dollar a little softer. Yet there are plenty of reasons to suspect the DXY dollar index will find good buying interest under 106.00.

EUR: Bearish consolidation

Having fallen nearly 8% between late September and mid-November, it is no surprise to see EUR/USD undergoing some consolidation. But we view this as a bearish consolidation rather than base-building. Be it European political risk, weak activity, the threat of trade wars or energy prices creeping higher (EU gas inventories are starting to come under pressure) there are many reasons to be underweight in the euro.

The eurozone data calendar is pretty light today, just October PPI inflation data and some final November PMI readings. But we do have ECB President Christine Lagarde speaking at the EU parliament at 1430CET. We doubt she will shed much light on whether the ECB will cut rates by 25bp or 50bp on 12 December, although 25bp looks much more likely at the moment. 

Our bias would be for EUR/USD to be capped around the 1.0550 area and it would be no surprise if EUR/USD dropped back towards 1.0400 over the coming days – unless Friday's US NFP data dramatically disappoints consensus of +200/220k. 

Elsewhere, we have Bank of England Governor Andrew Bailey speaking at a Financial Times event at 1000CET today. He occasionally errs into dovish territory but probably does not have the ammunition to do that today. Still, there are downside risks to GBP/USD from the speech – perhaps taking the pair to 1.2590/2620 on the day.

PLN: NBP can deliver further zloty gains

Today in Poland we will see the decision of the National Bank of Poland. It is likely to leave rates unchanged at 5.75% in line with expectations. Also, a statement will be published which could assess the new GDP data and the government's intention to freeze energy prices, lowering the trajectory of headline inflation next year. This could give us a clue as to what tone we can expect from Governor Adam Glapinski's press conference tomorrow. Our economists see the odds growing that the MPC decides to surprise markets with the first cut in March and by 50bp rather than 25bp.

Market pricing is on the dovish side with a fully priced rate cut in March next year and roughly 20% priced for February. This comes ahead of the next NBP forecast which is a prerequisite for most MPC members to discuss rate cuts. At the same time, some MPC or board members close to the governor in recent days have made more hawkish statements. Taken together, the Governor's press conference could thus be neutral or slightly hawkish given the aggressive dovish pricing, in our view.

PLN has outperformed CEE peers since the US election and has likely surprised with strong levels thanks to short positioning in recent weeks. Although we retain a bearish view on the CEE region given the geopolitical shift post-US election, we believe that tactically PLN may see more gains. And some hawkish repricing can support the zloty despite stronger levels in recent days. Therefore, a test of 4.280 EUR/PLN is on the table for the coming days.

CZK: CNB governor to repeat usual hawkish message

In the Czech Republic, the government yesterday approved the state budget for next year, as expected, which we estimate should lead to a public deficit of 1.9% from this year's 2.4% of GDP. Third quarter wage data will be released today, which we estimate rose by 4.0% YoY in real terms, similar to the previous quarter. The central bank forecast 3.6% in November. Speaking of the Czech National Bank, the governor is also scheduled to speak at a local conference today, which could give us a hint on the December decision, which remains unclear. However, we usually get a hawkish message from the governor, which could again support the CZK.

EUR/CZK quickly broke below 25.200, a level we have mentioned here in previous days, and current levels in the 25.150-200 range seem fair to us. If the governor makes it clear today that a pause in December is the more likely scenario, EUR/CZK could test 25.100. Similar to PLN, we see tactical gains here but more weakness later due to geopolitical reasons.

Macro data and headlines

Rep. Lee Jae-myung, front, chairman of the main opposition Democratic Party of Korea, delivers a speech, urging President Yoon Suk Yeol to step down following the repeal of martial law at the National Assembly in Seoul, Wednesday. Yonhap

Stocks of companies linked to key political figures cited as potential presidential candidates surged on Wednesday amid increasing calls for President Yoon Suk Yeol to resign following his sudden declaration of emergency martial law the day before.

At 9:40 a.m., Orient Precision traded at 1,470 won ($1.04), up 29.97 percent from the previous trading day, on the secondary Kosdaq market.

The automotive parts manufacturer is categorized as a prominent thematic stock related to Rep. Lee Jae-myung, chairman of the main opposition Democratic Party of Korea (DPK), as he previously worked at its affiliate, Orient Watch Company.

In the past, Lee officially announced his presidential candidacy at the factory of this affiliate.

Soosan INT, another stock classified as a Lee Jae-myung stock, also hit the upper price limit, trading at 11,400 won, up 29.99 percent from the previous day. This classification is due to the company’s CEO previously serving as a co-chair of the sponsorship committee for Lee’s campaign.

Other stocks related to Lee, including Atec, Atec Mobility and Eastaco, also hit their upper price limits, up 29.99 percent, 29.95 percent and 29.88 percent, respectively.

Atec is based in Seongnam, Gyeonggi Province, where Lee previously served as mayor.

Han Dong-hoon, chairman of the ruling People Power Party, arrives at the National Assembly in Seoul to attend the party's emergency meeting, Wednesday. Yonhap

Similarly, stocks related to Han Dong-hoon, chairman of the ruling People Power Party, surged, including Opasnet, which increased by 26.58 percent.

The IT service management company is considered a stock related to Han as one of its outside directors is known to have been his classmate at the Judicial Research and Training Institute.

Daesang Holdings also saw a sharp rise, up 21.08 percent on the main bourse KOSPI. The advertising agency is associated with Han due to his close friendship with actor Lee Jung-jae, whose partner, Lim Sae-ryung, the firm’s vice chair, is its second-largest shareholder.

Stocks related to Seoul Mayor Oh Se-hoon, such as Hanil Chemical and Jinyang Chemical rose with relatively lower intensity, up 3.81 percent and 0.22 percent, respectively.

Yoon declared emergency martial law late Tuesday night, accusing the opposition party of paralyzing the government with “anti-state activities.” But the decree was lifted six hours later at the National Assembly as 190 lawmakers rejected Yoon's decision in an emergency vote. Under the Constitution, martial law must be lifted when a parliamentary majority demands it.

Following Yoon’s declaration of martial law, which was criticized even by the ruling party leader, who said the action was wrong, the DPK urged the president to resign immediately. The party stated that they would push for impeachment if he does not step down.

Yoon’s term is scheduled to end on May 9, 2027.

The KOSPI closed at 2,467.76, down 32.34 points, or 1.29 percent, from the previous trading day, while the Kosdaq closed at 677.2, down 13.6 points, or 1.97 percent.

Source: Koreatimes

South Korea briefly stole the light from the French political chaos after President Yoon suddenly imposed the martial law yesterday accusing the opposition party – which holds the majority in the parliament – of paralysing his administration, only to lift it a few hours later. The Korean won and the stocks fell, and the volatility in broader Asian markets and cryptocurrencies was higher, but the impact remained limited, the US and European futures are set for a positive open and France could safely come back to the front of the scene with lawmakers preparing to hold a no-confidence vote today and to take Barnier’s government down. You can’t tell that risk by looking at the CAC 40 – which closed 0.26% higher yesterday, and at the French 10-year yield – which eased to the lowest levels since fall over the last week. But the CAC 40 is set to print its biggest performance gap in three decades with the German DAX index. And the spread between the 10-year French and German papers has advanced to the highest levels since the euro debt crisis of a decade ago. This being said, the soft reaction to the French chaos is surprising.

In the US, sentiment remains cheerful and cozy at the start of December. The S&P500 consolidated gains near its ATH level, Nasdaq 100 hit a fresh record while Dow Jones diverged negatively for the second straight session. Data-wise, the latest figures released yesterday showed that the job openings in October rose more than expected by analysts. Optimism rose too, though less than expected. Federal Reserve’s (Fed) Mary Daly said that there is no certainty that the Fed will cut the rates this month, but that, the option remains on the table. Activity on Fed funds futures gives more than 70% chance for another 25bp cut from this month’s FOMC meeting. This week’s jobs, and next week’s inflation data will say the last word. Due today, the ADP report is expected to print lower job additions last month compared to a month ago, while the expectation for Friday’s NFP is around 200K new job additions, with slightly higher unemployment rate and slightly lower wages growth. Soft data will have no difficulty convincing the Fed doves that another 25bp is on its way this month, while a strong-looking set of data could add some suspense to the mix, but eventually, the Fed will certainly cut.

As such, the US dollar bulls prefer to sit on the sidelines, and the US dollar index consolidates around the minor 23.6% Fibonacci retracement on September to November rally. The EURUSD takes the opportunity to catch its breath before another potentially hectic session – depending on what the French politicians decide to do with Barnier and his ambition to reduce the French budget deficit toward the EU targets. We may not see a major selloff in single currency if the French government is taken down, as that possibility must be fully priced in by now. But the pair will remain in the bearish trend below the 1.0672 level – the major 38.2% retracement – justified by the dovish European Central Bank (ECB) expectations amid the doomy economic fundamentals, the messy politics in core European countries and Trump’s tariff threats.

In Japan, the USDJPY continues to test the 100-DMA to the downside, but each attempt ends with a fresh rebound back to the 150 level. While the idea that the Bank of Japan (BoJ) could hike the rates one more time before this year ends keeps the yen bears contained, investors around the world sound unwilling to abandon their carry trade strategy, as even another rate hike in Japan wouldn’t squeeze the rate differential enough to walk out of the yen as a funding currency. That means that the yen’s recovery path won’t be smooth, and it’s good news for the global markets. The last time the yen appreciated significantly – it was during summer – the global indices were heavily hit.

In energy, US crude rallied more than 2.5% to above $70pb on news that the US will impose more restrictions on the Iranian oil exports and on chatter that OPEC is getting closer to delaying its plans to restore production by another 3 months. The decision announcement is due tomorrow. The short-term risks remain tilted to the upside, but delaying production will only prevent global oil glut from getting worse, but won’t reverse it. As such, once the geopolitical news and OPEC decision are absorbed, the bears will be happy to return to the field. Short-term price rallies are interesting top selling opportunities. The bearish trend is valid below the $72.85pb level, the major 38.2% retracement on summer selloff.

Why the Euro Could Soon Recover

Source: Poundsterlinglive