USD: Some well deserved consolidation

FX markets are seeing some well-deserved consolidation after a volatile few weeks. The near 7% DXY appreciation in just six weeks had been one of the sharpest adjustments in FX markets since the summer of 2022. As Francesco Pesole noted yesterday, positioning is probably the biggest threat to the dollar right now, although we may also start to hear of dollar seasonality again where DXY has fallen in eight of the last 10 Decembers and for the last seven consecutive Decembers. 

With the US data calendar quiet this week, attention remains on the make-up of President-elect Trump's cabinet. One of the most relevant positions for financial markets is the post of US Treasury Secretary. This has yet to be decided, but it seems there are at least four names in the running: Kevin Warsh (ex-Federal Reserve), Marc Rowan (Apollo Global Management), Howard Lutnick (CEO of Cantor Fitzgerald), and Scott Bessent (Key Square Group). Some reports even have Robert Lighthizer as still being in the mix for this position. The relevance of the pick for financial markets will probably be how the US Treasury market reacts. A candidate with proven reliability will be well-received by the bond markets, while those with less experience – or perhaps a candidate that will offer less of a counterweight to some of President-elect Trump's plans – could see the long end of the US Treasury market sell-off and perhaps even soften the dollar too.

DXY is currently holding support just above 106.00 and even a correction back to 105.65 would still keep the near-term bullish trend intact. We see no reason for a large dollar correction at the moment, but equally not a clear catalyst for an advance.

EUR: Brief reprieve after some hawkish comments

EUR/USD is enjoying a brief correction as some of the ECB hawks speculate over whether global fragmentation (i.e. shortening of supply chains and trade wars) will be inflationary and will call for higher interest rates. These were the thoughts of ECB's Joachim Nagel yesterday – comments which helped narrow the two-year EUR:USD swap differential by around 10bp and saw EUR/USD correct to 1.06.  

On the subject of rate differentials, the market currently prices 10bp of Fed cuts in December (we look for 25bp) and 31bp of ECB cuts (we look for 50bp). Of course, if the Fed cuts 25bp and the ECB only cuts by 25bp, there could be a little upside for EUR/USD amid the seasonal dollar patterns we discuss above.

For the time being, however, we do not see a compelling case for EUR/USD to correct much higher and even a move to 1.0660/65 would still be in keeping with a bearish near-term trend. Expect another quiet day for EUR/USD with a focus on the US Treasury pick, as discussed above.

CAD: October CPI figures will be important

Canada releases inflation figures for October today. Expectations are for a rebound in headline CPI to 1.9% YoY while core measures are seen stabilising around 2.4%. This is the last CPI report the Bank of Canada will see before the 11 December meeting, meaning the release can have deep implications for market pricing, which currently embeds nearly even chances of a 25bp or 50bp cut.

The other two major inputs for the BoC will be GDP data on 29 November and the November jobs report on 6 December. We still see a 25bp move as more likely as both activity and inflation seem to be stabilising and markets have scaled back some Fed easing expectations. We see a case for some modest tightening in the USD:CAD 2-year swap rate gap from the current 100bp level, which can put a cap on USD/CAD in the near term. We still expect the pair to end the year below 1.40.  

HUF: How hawkish can the NBH be?

Today's meeting of the National Bank of Hungary should be a non-event in terms of a rate decision. Central bankers have made it clear that the cutting cycle is on hold for some time due to high financial instability, meaning too high a EUR/HUF. Numbers from the economy continue to surprise on the downside, with third-quarter GDP confirming a return to technical recession and headline inflation surprisingly holding close to the central bank's target. In fact, Hungarian headline inflation is the closest to the target among CEE peers at the moment. However, the central bank's focus is on EUR/HUF which has repeatedly broken above 410.

Although the market was still pricing in rate hikes in late October and early November, these expectations have calmed since the US election and the market has rebuilt some rate cuts into the longer horizon of the FRA curve. Still, the NBH does not appear to have won. While market positioning is less short on the HUF than before the US election, the market still sees EUR/HUF heading more to the upside. So the NBH will have to show enough hawkish rhetoric today to be able to return EUR/HUF to more acceptable levels.

At the same time, the NBH will want to avoid any hints of an additional rate hike or other stronger measures. EUR/HUF briefly returned to 410 yesterday but surprised with a reversal below 407 at the end of trading. Visibly the market is looking for a way to go. However, we believe 410 will remain the point of gravity in the current global environment, which the NBH does not fully control – namely the negative for the entire CEE region led by EUR/USD pushing lower.

Markets

US Treasuries followed last week’s recipe. Testing the recent low (area; depending on the maturity), but eventually rebounding higher. This time without strong trigger though like Thursday’s Powell speech or Friday’s retail sales. The move seemed more erratic in nature. Timing didn’t fit with the release of second-tier, but consensus-beating US figures. NY Fed services business activity rose from -2.2 to -0.5 in November, with details showing strength in business activity and employment.

Both in the current and 6-month forward looking subindex. The NAHB housing index recorded a third consecutive increases to a 7-month high, from 43 to 46. The 6-monht sales outlook reached the highest level since April 2022 on hope on looser regulation and more construction during president Trump’s second tenure. Yesterday’s price action strengthens our short term consolidation call as dust settles over the US presidential elections, in absence of important eco data and with the Fed not in a hurry. Intraday changes on the US yield curve ranged between -0.7 bps and -3.3 bps with the belly of the curve outperforming the wings. German Bunds underperformed US Treasuries (GE 2y: +5.4 bps) in what could be the start of an opposite (to US Treasuries) consolidation phase. EUR/USD profited from relative yield dynamics with the pair being squeezed from 1.0531 to 1.0598.

Dovish Greek ECB member Stournaras labelled a December 25 bps rate cut a done deal and added that it’s an optimal reduction. That way, he dented more aggressive market bets calling on a 50 bps move (25% probability). This week’s eco data have the potential to completely close the door obviously depending on their outcome. The ECB built her recent reaction function on what her president Lagarde calls “the three criteria”: the inflation outlook, the dynamics of underlying inflation and the strength of monetary transmission.

Tomorrow, we receive important info on the second pillar via Q3 negotiated wage data. Annualized wage growth remained between 4.3% and 4.7% from Q1 2023 to Q1 2024. Last quarter’s decline to 3.5% was welcomed by the ECB in its inflation fight, but remains way above the central bank’s 2% inflation target. ECB Lagarde indicated that forward-looking wage trackers point to a an easing of pay growth in 2025 which she hopes to see reflected in tomorrow’s numbers. On Friday, EMU November PMI’s are expected to paint a similar, dire, picture as in October (50 for composite). Recall though that there was a serious discrepancy between weak Q3 soft data and hard data (+0.4 Q/Q EMU GDP growth).

News & Views

ECB chair Lagarde in yesterday’s “The economic and human challenges of a transforming era” speech again called for a(n effective) single market for both goods and capital in order to reverse progressively slowing productivity. “By acting as a union to raise our productivity growth, and by pooling our resources in areas where we have a tight convergence of priorities – like defense and the green transition – we can both deliver the outcomes we want and be efficient in our management of public spending.” Lagarde stressed the need for such changes given the two megatrends that are challenging the bloc’s economic model. The first is a new geopolitical landscape. An increasingly inward-looking global environment is a hazard to the open European economy.

The second is Europe falling behind in emerging technologies, specializing mostly in technology developed the last century. Lagarde said the innovation and financing ecosystems are not suited to develop new advanced technologies, noting that about a third of EU savings sit in cash and bank deposits compared to around one-tenth in the US. She floated an amount of up to €8tn that could be redirected into long-term investments if EU households were given better opportunities to invest their savings. The still-existing trade barriers within the EU’s single market for goods and capital are estimated to represent a shortfall of around 10% of the EU’s economic potential.

San Francisco Fed economists in research published yesterday said that the US labor market is still adding to inflationary pressures, be it less than in 2022 and 2023. “Declines in excess demand pushed inflation down almost three-quarters of a percentage point over the past two years. However, elevated demand continued to contribute 0.3 to 0.4 percentage point to inflation as of September 2024.” The findings offer some counterweight to Fed chair Powell’s observation back in the summer, when he said that the job market is no longer a source of significant inflationary pressures.

Source: ACTIONFOREX

In focus today

Today, in euro area we receive final October HICP inflation data. This will show drivers of inflation and allow us to calculate the “LIMI” indicator of domestic inflation, which has received great attention from the ECB lately.

In Sweden, the day begins with a speech from Riksbank’s Anna Breman at 8.15 CET, focusing on “Current monetary policy and the economic situation”. This follows several notable events since the 6 November decision, such as US election, higher-than-expected inflation for October, and significantly higher electricity prices, presenting various discussion points. At 10.00 CET, the Swedish National Financial Management Authority will present new forecasts on the economy and public finances.

Today, we also have a few ECB speeches as well as some BoE speeches including BoE Governor Baily.

Economic and market news

What happened yesterday

In the euro area, ECBs Lagarde highlighted the critical need for Europe to reverse declining growth to sustain its welfare provisions, increase defence spending and address climate change. Lagarde emphasized the necessity for bold economic policies to generate the required wealth for these purposes. She also focused on the urgency of adapting to a changing geopolitical landscape and regaining competitiveness and innovation. Lagarde also pointed out Europe’s vulnerability to trade wars due to its heavy reliance on trade, which makes up more than half of its economic output.

Equities: Global equities were higher yesterday, with European markets lagging behind the rest. We observed some elements of the Trump trade, though not nearly to the extent we witnessed in the immediate aftermath of the elections. Health care continued to underperform, while the materials sector experienced a slight recovery after several challenging weeks for the China-linked sector.

The VIX was marginally lower and appears to have stabilised around the 15 level, aligning with expectations given the current macroeconomic backdrop.

In the US yesterday, Dow -0.1%, S&P 500 +0.4%, Nasdaq +0.6%, and Russell 2000 +0.1%.

Asian markets were broadly higher, while South Korea underperformed for the second consecutive day. US and European futures are higher this morning.

FI: The EUR swap curve saw some bearish flattening through the Monday session, which was characterized by being very limited on market moving news. The 2Y tenor was up some 5bp throughout the session, while the 10Y point rose 3bp. The Bund ASW-spread at -2.5bp was roughly unchanged, similar to peripheral and EUR credit spreads.

FX: USD sold off against all currencies but the JPY to start the week. Commodity currencies, NOK, AUD and CAD gained the most on Monday. EUR/USD rose towards 1.06, EUR/SEK traded around 11.60 and EUR/NOK around 11.70.

The S&P500 rebounded 0.39%, while Nasdaq added 0.71%, supported by a more than 5.5% jump in Tesla shares on rumours that Trump administration wants to make a federal framework for fully self-driving vehicles one of the Department of Transport’s priorities. And remember, Elon Musk’s robotaxis is one of the company’s priorities for the future development and had helped – earlier this year – revive appetite for Tesla despite the slowing sales of EV sales. So yes, the news couldn’t come at a better time for Tesla.

News were not as good on the Nvidia front though, as Nvidia’s Blackwell chips – you know the next generation chips that see an insane demand according to the CEO Jensen Huang – reportedly overheat, requiring redesign and delay for deliveries. Of course, you can argue that this type of adjustments are standard for such large-scale tech releases, and they should not have a material impact in the long run, but the delay in the short run mean that the big customers like Meta, Google and Microsoft won’t have their chips on time, the latter will extend the payoff period on their investments at a time investors can’t wait to see these investments bear fruit. Nvidia retreated 1.30% yesterday, as the news that the company is now working with Google to design its next generation quantum computing devices helped countering the negative vibes of the overheating Blackwell chips.

The Blackwell news triggered a 3% rally in AMD that also sells high capacity chips for AI applications. ‘The MI325X is expected to begin production by late 2024, while the MI350 series aims for up to 35 times better inference performance compared to its predecessors and is set to launch in 2025’​, according to ChatGPT. Any misstep from Nvidia could help AMD gain market share. For now, investors are focused on the next earnings report from Nvidia that will land on Wednesday, after the closing bell, and will hopefully put a number on how insane the demand for these Blackwell chips, whether they are overheating or not.

Beyond tech, the Dow Jones index was not cheery, yesterday, the index closed the session slightly lower, while small caps were slightly up on lower yields, but the direction of the yields are not encouraging the small cap investors given that these companies have smaller margin to deal with higher borrowing costs. As such, the buyers are seen more crowded in big caps, and even the most bearish of the bears on the Wall Street are busy lifting up their PT for the S&P500. The 6500 is increasingly pronounced for the S&P500, while gold is also among the top picks at Goldman Sachs, apparently, which sees the precious metal top the $3000 per ounce next year. In the short-run, the retreat in the US yields helped throw a floor under the gold’s retreat. We see a beautiful support forming near the minor 23.6% Fibonacci retracement and the 100-DMA – that’s around $2550 level.

In Europe, the Stoxx 600 index was flat, the Chinese stocks are lower as the Chinese authorities gather in Hong Kong to discuss the latest developments in China’s financial sector, while the Japanese Nikkei is under the pressure of a rebound in the Japanese yen against the US dollar, on the back of a broadly softer US dollar – a move that I believe is just a correction of the past few week’s rally on political developments and the hawkish shift in Federal Reserve (Fed) expectations.

The EURUSD tested the 1.06 psychological resistance yesterday, supported by the weak dollar and also the news that Greece will repay 5 billion euros of long-term debt before time. But outlook for the EURUSD remains negative on divergence between the European Central Bank (ECB) and the Fed, Hence, price rallies in the EURUSD will soon create interesting opportunities for the euro bears to come back in and give an other try to breaking the 1.05 offers’ back.

In energy, US crude posted a 3% rally yesterday, but the bulls could find the $70pb offers hard to clear, as the amply global supply / weak global demand outlook remains supportive of the bears. The short-end of the market shifted into contango, another signal that investors price in an oversupplied oil market, which could cap the upside potential of short-term price rallies. Solid resistance is seen between $70/72pb range. The key resistance to the actual negative trend – that has been building since summer – stands at the $72.85pb level – which is the major 38.2% Fibonacci retracement on summer decline.

Source: AP