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SEOUL - South Korea’s factory activity rose in November, after two straight months of declines, thanks to improving demand in Asia, a private sector survey showed on Dec 2.

The purchasing managers index (PMI) for manufacturers in Asia’s fourth-largest economy, compiled by S&P Global, rose to 50.6 in November, above the 50 mark that separates expansion from contraction and 48.3 in October.

“November PMI data signalled that the South Korean manufacturing sector saw a renewed improvement in operating conditions,” said economist Usamah Bhatti at S&P Global Market Intelligence. “Firms were particularly buoyed by international demand.”

New orders rose for the first time in three months, with new export orders growing at the fastest pace since July. Output fell but the decline was milder than the month before.

In the survey, manufacturers noted new contract wins and orders for new products from abroad, particularly from major markets across the Asia-Pacific region.

Economic activity has been improving in China recently with Beijing rolling out stimulus measures as it braces for the second term of US President-elect Donald Trump, who has vowed more tariffs against China.

South Korea last week delivered a surprise interest rate cut and signalled more to come, as policymakers turned a wary eye to trade risks from a second Trump presidency.

The rebound in export demand last month pressured production capacity, with backlogs of work rising for the first time in five months and at the fastest rate since June 2022, while stocks of raw materials and semi-finished goods jumped the most in 14 months.

Manufacturers’ optimism for the year ahead improved to a three-month high, as firms hoped for continued growth in new product orders and improvements in domestic conditions. 

Source: Straitstimes

The EUR/USD pair faces some selling pressure to around 1.0530 amid the firmer US Dollar (USD) during the early Asian trading hours on Monday. Investors will closely monitor the speech by the European Central Bank’s (ECB) President Christine Lagarde and the release of the US ISM Manufacturing Purchasing Managers' Index (PMI), which is due later on Monday. Inflation in the Eurozone, as measured by the Harmonized Index of Consumer Prices (HICP), rose to 2.3% YoY in November from 2.0% in October, in line with market expectations. This figure overreached the ECB 2.0% target.

Meanwhile, the Core HICP climbed by 2.8% YoY in November, compared to 2.7% in the previous reading, which was also in line with expectations. Market participants have fully priced in a 25 basis points (bps) rate cut from the ECB in December, which would signify the bank’s fourth rate reduction this year. However, expectations of a substantial 50 bps reduction have been dwindling since last month, with slight enhancements in the Eurozone’s tepid growth forecast. The expectation that the ECB will cut interest rates at their December meeting exerts some selling pressure on the Euro (EUR). 

On the other hand, the cautious stance of the US Federal Reserve (Fed) might continue to underpin the Greenback. Fed Chair Jerome Powell highlighted that “the economy is not sending any signals that we need to be in a hurry to lower rates. Powell added that “the strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.” The markets now see nearly a 65.4% odd that the Fed will cut rates by a quarter point in December, according to the CME FedWatch Tool.

Euro FAQs

What is the Euro?

The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Source: FXSTREET

We expect Canadian employment edged up 10,000 with the unemployment rate rising to 6.7% in November from 6.5% in October. Canada has steadily posted job growth, but not fast enough to keep up with growth in the labour force as the population continues to rise rapidly. The past two months were an exception—the unemployment rate ticked lower for the first time since January in September and held at that level in October—but largely because of a sharp pullback in the share of, particularly younger, workers giving up their job search. The unemployment rate is still running almost 1 percentage point above year-ago levels and hiring demand has continued to slow with job openings falling. Data from the latest Survey of Employment Payrolls and Hours showed September job openings were still down 18% year-over-year. We expect the labour force participation rate to partially reverse the 0.3 percentage point decline over the last two months.

The U.S. labour market, on the other hand, has remained firm, supported by resilient economic growth. We look for U.S. payroll employment to bounce back 157,000 in November after a 12,000 increase in October. That October increase was the smallest rise since the pandemic, but the reading was distorted by disruptions from hurricanes and strikes. The unemployment rate (which is less impacted by those disruptions) is expected to hold steady at 4.1% for a third consecutive month in November. That would still be up from 3.7% a year ago, but below a recent “peak” 4.3% in the summer.

Beneath the surface, the U.S. labour market is still showing signs of softening. Job openings have continued to fall, and quit rates are at their lowest level since 2020. We continue to expect the unemployment rate will edge higher into next year, but it’s still historically low. We see it “normalizing” rather than faltering with support from an unusually large government budget deficit.

The Bank of Canada and U.S. Federal Reserve will take these employment readings into consideration before their final policy decisions of the year in December. We continue to expect deeper interest rate cuts will come from the BoC than the Fed in the year ahead, reflecting substantial and persistent underperformance in Canadian economic growth and easing inflation pressures.

The data watch

We expect the Canadian trade deficit narrowed to $0.3 billion in October from -$1.3 billion in September, mainly driven by higher exports. Oil prices rose in October, pushing up the energy trade balance.

We expect U.S. trade deficits narrowed to $75B in October. According to the advance trade report, the goods deficit shrank $9.6B, with declines in both goods exports and imports.

Source: ACTIONFOREX

NFP and ISM PMIs to shape Fed expectations

The US dollar took a breather last week, pulling back even after being temporarily boosted by US President-elect Donald Trump’s tariff threats on Canada, Mexico and China.

Perhaps traders decided to capitalize on their previous Trump-related long positions heading into the Thanksgiving Holidays and this week’s all-important data releases. Market pricing is far from suggesting that investors’ concerns about a Trump-led government are receding.

This is evident by Fed funds futures still pointing to a strong likelihood of a pause by the Fed at the turn of the year. Specifically, there is a 35% chance for policymakers to take the sidelines in December, with the probability of that happening in January rising to around 58%. What’s also interesting is that there is a decent 27% likelihood for the Committee to refrain from hitting the rate cut button at both gatherings.

With that in mind, this week, market participants are likely to pay extra attention to the ISM manufacturing and non-manufacturing PMI data for November, due out on Monday and Wednesday, but the highlight of the week is likely to be Friday’s Nonfarm payrolls for the same month.

With inflation proving somewhat hotter than expected in October, the prices charged subindices of the PMIs may be closely monitored for signs as to whether the stickiness rolled over into November. The employment indices will also be watched for early clues regarding the performance of the labor market ahead of Friday’s official jobs data.

Should the ISM PMIs corroborate the notion that the world’s largest economy continues to fare well, the probability for the Fed to take the sidelines at the turn of the year will increase, thereby refueling the dollar’s engines. However, whether a potential rally will evolve into a strong impulsive leg of the prevailing uptrend will most likely depend on Friday’s numbers. Following October’s 12k, which was the smallest gain since December 2020, nonfarm payrolls may need to return above 200k for investors to become more confident in the dollar uptrend.

The JOLTs job openings for October on Tuesday and the ADP employment report for November on Wednesday could also offer clues on how the US labor market has been performing.

Is a back-to-back 50bps cut off the table for the BoC?

At the same time with the US jobs data, Canada releases its own employment report for November. At its latest gathering, on October 23, the BoC cut interest rates by 50bps to support economic growth and keep inflation close to 2%, adding that if the economy evolves broadly inline with their forecasts, further reductions will be needed.

Investors were quick to pencil in a strong likelihood for a back-to-back double rate cut, but the hotter-than-expected CPI numbers for October made them somewhat change their mind. Currently there is only a 25% chance of such a bold move, with markets becoming more convinced that a quarter-point cut could be enough.

With that in mind, a strong report on Friday could further weigh on the chances of a double cut by the BoC and thereby support the loonie. Nonetheless, an upbeat employment report may not be enough for the currency to change orbit and begin a bullish trend. More threats by US president-elect Trump about tariffs on Canadian goods could result in more wounds for the currency.

Strong GDP could keep the RBA on hold for longer

From Australia, the GDP data for Q3 are coming out on Wednesday, during the Asian morning. The RBA is the only major central bank that has yet to press the rate cut button in this easing cycle, with market participants believing that the first 25bps reduction is likely to be delivered in May.

The latest monthly inflation data revealed that the weighted CPI held steady at 2.1% y/y, but the headline rate rose to 2.3% y/y from 2.1%. With the quarterly prints also pointing to weighted and trimmed mean rates for Q3 at 3.8% and 3.5% respectively, it may take time before this Bank starts considering lowering rates, and a strong GDP number for that quarter could prompt investors to push further back the timing of the first reduction.

This could prove positive for the aussie, but similarly to the Canadian dollar, it may be destined to feel the heat of Trump’s tariffs as the president-elect has pledged to hit China with even bigger charges than Canada.

Will ECB’s Lagarde agree that a 50bps cut may not be needed?

In the Euro area, although Germany’s preliminary inflation numbers for November came in below expectations, they still revealed some stickiness, with the headline rate rising to 2.2% y/y from 2.0%. The Eurozone’s headline rate also moved higher, to 2.3% y/y from 2.0%.

Combined with hawkish remarks by ECB member Isabel Schnabel who said that rate cuts should be gradual, this weighed on the probability of a 50bps reduction by the ECB at its upcoming meeting, despite the disappointing flash PMIs for the month. Currently the probability for the ECB proceeding with a double cut on December 12 stands at around 20%.

Having that in mind, this week, euro traders may lock their gaze on a speech by ECB President Lagarde on Wednesday, who will make an introductory statement before the Committee on Economic and Monetary policy Affairs (ECON) of the European Parliament. They may be eager to get more information about how the ECB is planning to move forward.