Don't Even Go There
- Trump ensured the dollar continues to reign supreme.
- French government risk collapsing if no budget compromise is reached today.
- China’s November PMI data remains indicative of sluggish economic growth.
Please see our Drivers for the Week Ahead for an in-depth look at what markets are facing this week.
USD kicks-off the week stronger after dropping over 2% from its November 22 high. US President-elect Donald Trump’s warning shot to the BRICS alliance (which consists of Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran and the United Arab Emirates), French political uncertainty, and soggy Chinese economic activity are supporting USD.
Trump wrote in a social media post “we require a commitment from these countries [the BRIC alliance] that they will neither create a new BRICS currency, nor back any other currency to replace the mighty U.S. dollar or, they will face 100% tariffs, and should expect to say goodbye to selling into the wonderful U.S. economy.” Trump added there is “no chance” BRICS will replace the U.S. dollar in global trade and any country that tries to make that happen “should wave goodbye to America.”
A BRICS currency was never going to be a serious threat to the dollar’s unrivalled 80-year reign as an international currency. The dollar dominates as a store of value, medium of exchange and unit of account (see our special feature titled “King Dollar Not Ready To Abdicate” from our second quarter outlook report). Moreover, the BRICS is not a coherent economic or political bloc which is necessary to create and manage a common currency.
Overall, the more favorable US economic outlook relative to other major economies suggests the fundamental USD uptrend is intact. The focus today is on the US November ISM manufacturing print (3:00pm London). Headline is projected to recover to 47.6 vs. 46.5 in October. The regional Fed ISM manufacturing prints point to upside risk. Of note, the US S&P Global manufacturing PMI increased to a 4-month high at 48.8 from 48.5 in October. Fed speakers today include: Fed Governor Christopher Waller (8:15pm London) and New York Fed President John Williams (9:30pm London).
EUR/USD is down on French political uncertainty. French nationalist leader Marine Le Pen gave Prime Minister Barnier until today to make more concessions to the budget bill. Le Pen vowed to bring down the government in a no-confidence motion if her budget demands are not met. However, on Sunday, Finance Minister Antoine Armand pointed out “the French government doesn’t take ultimatums…We won’t be blackmailed.” Encouragingly, the higher risk premium on French bonds yields is not spreading to the rest of the eurozone. The 10-year yield premium for Italy, Spain, and Portugal over safer German peers are contained near recent lows.
EUR/GBP is breaking lower under 0.8300. The UK housing market recovery argues for a cautious Bank of England easing cycle. UK nationwide house prices growth overshot expectations rising 1.2% m/m in November (consensus: 0.2%) vs. 0.1% in October. This was the biggest monthly increase since March 2022. On a year-over-year basis, house prices are up 3.7% vs. 2.4% in October which is the highest since November 2022.
USD/CNH surged to a multi-month high above 7.2800 on Trump’s tariff threat and sluggish Chinese economic activity. In November, China’s composite PMI was unchanged at 50.8 for a second consecutive month, the manufacturing PMI increased 0.1pts to a seven-month high at 50.3 (consensus: 50.2), and the non-manufacturing PMI unexpectedly dropped 0.2pts to 50.0 (consensus: 50.3). Private sector factory growth traction was better than expected as the Caixin manufacturing PMI rose to a five-month high at 51.5 (consensus: 50.6) vs. 50.3 in October. Nevertheless, it’s hard to get excited about what is likely to be a short-term pickup in the economy following the unimpressive stimulus measures announced so far.
USD/JPY is consolidating around 150.00. Last Friday’s comments by Bank of Japan (BOJ) Governor Ueda suggests the bank could resume normalizing the policy rate at its December 19 meeting. Ueda said that the timing of the next rate hike is “approaching in the sense that economic data are on track to meet our forecasts.” Ueda also noted that “we will adjust the degree of monetary easing at the appropriate time if we become confident or certain that the economy will move as forecasted by our economic and price outlook – particularly that the underlying inflation rises toward 2 per cent in the second half of the period of the outlook (fiscal 2024 to 2026).” Japan core CPI (ex-fresh food & energy) inflation has been sticky just above 2% for several months now implying the likelihood the BOJ raises rates in December is high. Markets continue to price-in 60% odds of a hike this month.
AUD/USD is trading heavy near 0.6500 on broad USD strength. Australia retail sales improved more than anticipated in October. Nominal retail sales increased 0.6% m/m (consensus: 0.4%) vs. 0.1% in September. According to the Australian Bureau of Statistics “the stronger than usual October month saw some retailers enticing buyers to spend early with discounting, particularly on discretionary items.” Households remain budget conscious which should keep consumer spending growth subdued. Regardless, the RBA is in no rush to start easing. Last week Governor Michele Bullock stressed that “underlying inflation is still too high to be considering lowering the cash rate target in the near term.” RBA cash rate futures continue to imply a first full 25bps rate cut to 4.10% in May.
