Dollar Uptrend Intact

December 17, 2024
6 min read

Dollar Uptrend Intact  

  • The US economy continues to deliver stellar performance. The US November retail sales report is up next.
  • UK wage growth quickens more than expected in October. GBP outperforms as markets trim bets of BOE easing.
  • Snap elections in Canada early next year is increasingly likely. Today, the focus is on Canada’s November CPI print.

USD and Treasury yields and S&P500 are range-bound near recent highs. US economic outperformance remains a major theme favoring higher Treasury yields and a stronger USD.

The US economy continues to deliver stellar performance. In December, the US composite PMI surged to a 33-month high at 56.6 vs. 54.9 in November driven by stronger services sector growth momentum. For comparison, private sector activity is still contracting in the Eurozone while it’s stagnating in the UK and Japan.

The US November retail sales report is today’s highlight (1:30pm London). Retail sales is forecast to rise 0.6% m/m after rising 0.4% in October. Importantly, the retail sales control group used for GDP calculations is projected to rise 0.4% m/m vs. -0.1% in October. Overall, consumer spending is supported by positive real wage growth, healthy labor market and strong household balance sheet. The other US data due today are: November industrial production (2:15pm London), November business inventories (3:00pm London), and December NAHB housing market index (3:00pm London).

EUR/USD is trading heavy around 1.0500. Today’s Eurozone data will likely support the case for additional ECB rate cuts and further weigh on EUR. Germany’s December IFO business climate index (9:00am London) and ZEW survey (10:00am London) are expected to remain consistent with sluggish economic activity.

Yesterday, ECB Executive Board Member Isabel Schnabel argued for a gradual and data-dependent easing cycle as the policy stance today may already be in neutral territory. Schnabel pointed out that ECB staff estimate a nominal neutral rate of around 1.5% to 3.0%. However, she cautioned that changes in the demand for and supply of global savings suggest that equilibrium rates may be closer to the upper-end of that range.

GBP outperformed on faster UK wage growth. Total average weekly earnings ex-bonuses rose more than expected to 5.2% y/y (consensus: 5.0%) vs. 4.8% in September. The policy-relevant private sector earnings ex.-bonuses increased to 5.4% y/y vs. 4.9% in September and tracking above the Bank of England’s (BOE) Q4 projection 5.1% y/y. Faster wage growth risk fueling services inflation and raises the bar for the BOE to deliver additional rate cuts. The BOE is widely expected to keep the policy rate unchanged at 4.75% Thursday. Bottom line: monetary policy trend between the ECB and BOE still favors a lower EUR/GBP.

USD/CAD is breaking higher. Snap elections in Canada early next year is increasingly likely following yesterday’s unexpected resignation of Finance Minister Chrystia Freeland. The next election in Canada must take place on or before October 20, 2025. Polls have consistently shown Conservative leader Pierre Poilievre leading by a wide margin of as much as 25pts.

Canada’s November CPI report is due today (1:30pm London). Headline inflation is expected at 2.0% y/y vs. 2.0% in October while core inflation (average of trim and median CPI) is anticipated at 2.5 y/y vs. 2.55% in October. For reference, the Bank of Canada (BOC) projects headline and core CPI inflation to average 2.1% and 2.3% over Q4, respectively.

The BOC has room to ease further which is an ongoing drag for CAD. Inflation in Canada is close to 2%, inflationary pressures are no longer broad-based, and the growth outlook is soggy. BOC Governor Tiff Macklem confirmed yesterday that the bank will undergo a review of its monetary policy framework over the next year and half.

AUD/USD is under downside pressure and eyeing key support at 0.6337, the December 11 low. Australia’s Westpac–Melbourne Institute Consumer Sentiment Index dipped in December to 92.8 vs. 94.6 in November as consumers turn pessimistic on the economic and job market outlook. RBA cash rate futures imply about 60% probability of a 25bps cut in February.

NZD/USD is near cyclical lows and New Zealand 10-year bond yields had a kneejerk uptick overnight. New Zealand’s government raised its budget deficit projection across the forecast horizon. The wider deficits imply more debt issuance (NZ$20bn over the next four years) and less room for the RBNZ to keep easing aggressively.

Reuters report that Chinese leaders agreed for a 2025 GDP growth target of 5%, same as 2024, and a 2025 budget deficit of -4% of GDP vs. -3% of GDP in 2024. The additional one percentage point of GDP in spending amounts to about 1.3 trillion yuan. This won’t be enough to trigger a sustained recovery in Chinese economic activity. For reference, China’s 2008 fiscal bazooka which prevented a recession totaled 4 trillion yuan (12.5% of GDP in 2008).

National Bank of Hungary (NBH) meets today and is widely expected to keep rates steady at 6.50% (1:00pm London). At the last meeting November 19, the bank left rates on hold at 6.50%. Only one MPC member recommended a rate cut suggesting the bar for NBH to resume easing is high. Indeed, NBH noted again that “the base rate may remain at the current level for an extended period,” and emphasized that a “stability-oriented approach to monetary policy is of key importance.” The market implies 33bps of cuts over the next 12 months.

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