Dollar Firm as Key Data Week Begins

December 02, 2024

Win Thin

Markets are digesting President-elect Trump’s threat to the BRICS alliance; a BRICS currency was never going to be a serious threat to the dollar; November ISM manufacturing PMI will be the highlight; Canada also reports November PMIs this week
French political uncertainty continues to weigh on the euro; ECB doves are getting more vocal; eurozone final November manufacturing PMIs were reported
Governor Ueda hinted that the BOJ could resume normalizing the policy rate at its December meeting; Japan reported firm Q3 capital spending data; Australia reported firm retail sales; Caixin reported firm November manufacturing PMI; China continues to lean against yuan weakness

The dollar is firm as the new week begins. DXY is trading higher for the first time since last Tuesday near 106.180 ahead of key U.S. data this week. USD/JPY has recovered to trade back above 150, confirming our belief that it’s unlikely to trade below 150 for any significant amount of time given still-wide interest rate differentials that continue to favor the dollar. Elsewhere, the euro is trading lower near $1.0525 on French political risks (see below), while sterling is trading lower near $1.2710. We look for the dollar rally to continue after this recent period of consolidation. While the election results have turbo-charged this dollar move, faithful readers will recall that we have been resolute in our belief that the strong U.S. fundamental story continues to favor higher UST yields and a higher dollar. Data this week should confirm our thesis. Market pricing for the Fed has already adjusted, which has given the dollar a huge lift.

AMERICAS

Markets are digesting President-elect Trump’s threat to the BRICS alliance. 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.” Of note, the BRICS group consists of Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran, and the United Arab Emirates.

Let’s face it, a BRICS currency was never going to be a serious threat to the dollar’s unrivalled 80-year reign as the world’s reserve 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 are not a coherent economic or political bloc, which is necessary to create and manage a common currency.

November ISM manufacturing PMI will be the highlight. Headline is expected at 47.6 vs. 46.5 in October. Keep an eye on prices paid, which is expected at 56.0 vs. 54.8 in October. If so, it would be the highest since May and signals accelerating price pressures. The regional Fed ISM manufacturing prints point to upside risk for the headline. Of note, the S&P Global manufacturing PMI increased to a 4-month high of 48.8 vs. 48.5 in October. ISM services will be reported Wednesday.

Growth remains solid. The Atlanta Fed GDPNow model is currently tracking Q4 growth at 2.7% SAAR and will be updated today after the data. Elsewhere, the New York Fed Nowcast model is tracking Q4 growth at 1.8% SAAR and will be updated Friday. Its initial estimate for Q1 growth should be published Friday.

Canada also reports November PMIs this week. S&P Global reports its manufacturing PMI today and then its services and composite PMIs Wednesday. Ivey PMI will be reported Thursday. Markets are still pricing in a dovish BOC, with nearly 60% odds seen of follow-up jumbo 50 bp cut at the December 11 meeting.

EUROPE/MIDDLE EAST/AFRICA

French political uncertainty continues to weigh on the euro. French nationalist leader 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 Armand stressed that “the French government doesn’t take ultimatums…We won’t be blackmailed.” Encouragingly, the higher risk premium on French bonds yield is not spreading to the rest of the eurozone. The 10-year yield spreads for Italy, Spain, and Portugal over safer German peers are contained near recent lows.

ECB doves are getting more vocal. With regards to a larger 50 bp cut, GC member Kazaks said “that We’ll definitely discuss this. But one thing that you have to keep in mind is that uncertainty is still very high. We are still in a situation where there are still a lot of geopolitical risks. We don’t know how the US will implement tariff increases. We don’t know, therefore we still have to remain cautious.” November CPI data should not derail a December cut but will make a 50 bp hard to justify. The swaps market is now pricing in 150-175 of total easing over the next 12 months that would see the policy rate bottom between 1.50-1.75%.

Eurozone final November manufacturing PMIs were reported. Headline manufacturing PMI was unchanged at 45.2. Looking at the country breakdown, Germany fell two ticks from the preliminary to 43.0, while France fell a tick to 43.1. Italy and Spain reported for the first time and came in weaker than expected at 44.5 and 53.1, respectively. Both were down sharply from October. Services and composite PMIs will be reported Wednesday. Here too, Italy and Spain report for the first time and their composite PMIs are expected at 49.7 and 53.9, respectively. Both would be down from October.

ASIA

Governor Ueda hinted that the BOJ could resume normalizing the policy rate at its December 18-19 meeting. Last Friday, 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).” Markets continue to price in 60% odds of a hike this month.

Japan reported firm Q3 capital spending data. Total spending came in at 8.1% y/y vs. 6.7% expected and 7.4% in Q2, while spending ex-software came in at 9.5% y/y vs. 8.2% expected and 9.1% in Q2. Company sales and company profits both slowed more than expected to 2.6% y/y and -3.3% y/y, respectively.

Australia reported firm retail sales. October nominal retail sales increased 0.6% m/m vs. 0.4% expected and 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.” Regardless, the RBA is in no rush to start easing. Last week, Governor Bullock stressed that “underlying inflation is still too high to be considering lowering the cash rate target in the near term.” Markets continue to prince in the first full 25 bp rate cut to 4.10% in May.

Caixin reported firm November manufacturing PMI. Headline came in at 51.5 vs. 50.6 expected and 50.3 in October. Caixin services and composite PMIs will be reported Wednesday, with services expected at 52.4 vs. 52.0 in October. Over the weekend, officials PMIs were mixed. Manufacturing came in a tick higher than expected at 50.3 vs. 50.1 in October, while non-manufacturing came in three ticks lower than expected at 50.0 vs. 50.2 in October. As a result, the official composite was unchanged at 50.8. 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.

China continues to lean against yuan weakness. Since early November, the PBOC has kept the daily fix fur USD/CNY below 7.20. Indeed, the bank set the fix today at the lowest level since November 11 even as USD/CNH traded at the highest level since July 24 near 7.29 in response to Trump’s renewed tariff threats.

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