Dollar Mixed

December 09, 2024

6 min read

Elias Haddad

Dollar Mixed

China’s stimulus pledge triggered an improvement in financial market risk appetite.

China’s economy is still struggling to escape a deflationary spiral.

There are no policy-relevant economic data releases today. Please see our Drivers for the Week Ahead for an in-depth look at what markets are facing this week.

USD is holding on to Friday’s bounce. US and European equity futures are up. Crude oil future prices hardly budged after Syria’s Bashar al Assad regime crumbled over the weekend.

CNH and AUD jumped this morning on renewed China stimulus hope. China’s Politburo vowed “more proactive” fiscal policy and a “moderately loose” monetary stance next year. This was the first major shift in monetary stance since 2011. The Politburo also pledged to boost consumption “forcefully”, expand domestic demand in all aspects and “firmly prevent” systemic risks.

China’s economy is still struggling to escape a deflationary spiral. Headline CPI rose less than expected by 0.2% y/y (consensus: 0.4%) vs. 0.3% in October and core CPI (ex. Food & energy) increased one tick to 0.3% y/y. The decline in PPI eased to -2.5% y/y (consensus: -2.8%) vs. -2.9% in October but remains a source of downside pressure on CPI inflation. To escape the debt-deflation loop, Chinese policymakers need to ramp up fiscal measures to boost consumption. As such the latest Politburo announcement is encouraging.

The US November non-farm payrolls data remained consistent with a healthy labor market. Nonetheless, Fed funds futures upped bets of a 25bps rate cut next week to 85% vs 70% in part because the unemployment rate unexpectedly rose 0.1pts to 4.2% (consensus: 4.1%) on a lower participation rate of 62.5% (consensus: 62.7%, prior: 62.6%). Otherwise, non-farm payrolls rose 227k (consensus: 220k) and the previous two months gain were revised 56k higher. Average hourly earnings growth printed for a second consecutive month at 4% y/y (consensus: 3.9%) which is in line with the Fed’s 2% inflation target given annualized non-farm productivity growth was 2.2% in Q3.

In our view, the US macro backdrop suggests the Fed can pause easing this month. The Atlanta Fed GDPNow model estimate for Q4 real GDP growth notched-up to 3.3% SAAR from 3.2% on December 2 and recent data have raised the possibility that progress on inflation may be stalling above 2%. The US November CPI takes the spotlight this week (Wednesday).

A few Fed officials voiced their support for a cautious easing cycle following Friday’s US Jobs number. Cleveland Fed president Beth Hammack (voter) said “I believe we are at or near the point where it makes sense to slow the pace of rate reductions.” Fed Governor Michelle Bowman reiterated her preference to “proceed cautiously and gradually in lowering the policy rate as inflation remains elevated.” And San Francisco Fed President Mary Daly (voter) argued for a gradualist approach to monetary policy adjustment noting “the labor market remains in a good position.” There are no Fed speakers this week due to the media blackout ahead of the FOMC’s December 18 rate decision.

EUR/USD recovered slightly to 1.0560 and will be guided by the outcome of Thursday’s ECB meeting. The ECB is widely expected to cut rates 25bps and stick to its data-dependent guidance. Attention will be on President Lagarde’s press conference and the update macroeconomic projections. Judging from the recent soft batch of eurozone economic data, the ECB will likely tweak lower its inflation and real GDP growth forecasts. This can lead to a downward adjustment to Eurozone interest rate expectations against EUR.

The market is currently pricing in 150bps of total easing over the next 12 months that would see the ECB policy rate bottom near 1.75%, but we think it could go even lower. The political paralysis in France and Germany means the ECB will have to do the heavy lifting to support the Eurozone economy.

EUR/GBP is trading heavy under 0.8300. BOE Deputy Governor Ramsden speaks on financial stability and the central bank’s toolbox (1:00pm London). Overall, monetary policy trend between the ECB and BOE still favors a lower EUR/GBP.

USD/JPY is firmer above 150.00 as China’s stimulus pledge triggered an improvement in financial market risk appetite. Japan’s adjusted current account surplus widened in October to ¥2,409bn from ¥1,272bn in September. Annually, the current account surplus totaled ¥28,000bn in October (4.6% of GDP) which is JPY supportive especially during periods of heightened risk aversion.

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