Dollar Weakened, Not Beaten

November 29, 2024
6 min read

Dollar Weakened, Not Beaten

  • USD is down over 2% from last week’s fresh cyclical high. Fundamentals argue for a stronger USD.
  • Eurozone November preliminary CPI takes the spotlight today. Switzerland and Canada report Q3 GDP.
  • Tokyo November headline CPI inflation ran hot. JPY outperforms on expectations BOJ resumes hiking rates in December.

USD continues to correct lower against all major currencies. Thin holiday trading volumes, end-of-month portfolio rebalancing, and overbought technical conditions could be weighing on USD. Nevertheless, the more favorable US economic outlook relative to other major economies suggests the fundamental USD uptrend is intact.

EUR/USD recovered towards 1.0600 after testing a two-year low at 1.0335 last week. EUR will take its cue today from the Eurozone November preliminary CPI (10:00am London). Headline and core CPI inflation are projected to rise in November to 2.3% (prior 2.0%) and 2.8% (prior: 2.7%), respectively, reflecting base effects. The risk to Eurozone inflation is skewed to the downside after Germany’s EU harmonized CPI print undershot expectations in November. The ECB will also release today its October consumer inflation expectations survey (9:00am London).

French-German 10-year government bond yield spreads tightened to 82bps after widening to near a 12-year high at 86bps this week. French Prime Minister Michel Barnier will have to make more concessions to the budget bill to prevent the government from falling. Far-right National Rally President Bardella stressed yesterday that “other red lines” remained. In the meantime, French political uncertainty is not spreading to the rest of the Eurozone which limits the drag on EUR. The 10-year yield premium for Italy, Spain, and Portugal over safer German peers are contained near recent lows.

CHF will likely ignore Switzerland’s Q3 GDP report (8:00am London). Real GDP is expected to rise 0.4% q/q vs. 0.7% in Q2. Last week, SNB President Schlegel warned that negative interest rates cannot be ruled. Indeed, the SNB has plenty of room to slash the policy rate as Swiss inflation is tracking below the bank’s Q4 forecast of 1.0%. Market is pricing-in about 60% probability of a 50bps rate cut to 0.50% at the December 12 meeting.

JPY is outperforming and USD/JPY dropped briefly under 150.00. The Tokyo November CPI print keeps odds of a December Bank of Japan (BOJ) 25bps policy rate increase high at over 60%. Headline CPI and core ex-fresh food inflation ran hotter than expected at 2.6% y/y (consensus: 2.2%, prior: 1.8%) and 2.2% y/y (consensus: 2.0%, prior: 1.8%), respectively, reflecting fading energy subsidies. Core ex-fresh food and energy matched consensus at 1.9% y/y vs. 1.8% in October and remains below the BOJ’s 2% inflation target. Benign underlying inflation suggests the BOJ can afford to stay on hold for longer.

USD/CAD is trading heavy under 1.4000 on broad USD weakness. Canada’s Q3 GDP report is the domestic highlight (1:30pm London). Consensus is looking for 1.1% SAAR real GDP growth vs. 2.1% in Q2. The Bank of Canada (BOC) has penciled-in growth of 1.2% SAAR in Q3 driven by household consumption and government spending. The monthly GDP print for September and the October estimate are also due today. Statistics Canada advance information indicates that real GDP increased 0.3% m/m in September.

We expect the BOC to deliver a follow-up 50bps rate cut in December because inflation is close to 2%, and inflationary pressures are no longer broad-based. Additionally, monetary policy remains too tight, heightening the downside risk to the economy. At 3.75%, the BOC policy rate remains above the bank’s nominal neutral interest rate estimate of 2.25% to 3.25%.

USD/CNH is trading near the lower end of a multi-day 7.2300-7.2700 range. Chinese stocks gained ground on renewed stimulus hope ahead of the government’s Central Economic Work Conference mid-December. China’s November PMI data is due tomorrow. Manufacturing is expected to rise a tick to 50.2 while non-manufacturing is expected to rise two ticks to 50.4. 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.

AUD/USD is firmer above 0.6500 underpinned in part by a recovery in iron prices and still hawkish RBA. Yesterday, RBA Governor Bullock signaled again that the bank is in no rush to start easing. Bullock noted “As it currently stands, underlying inflation is still too high to be considering lowering the cash rate target in the near term.” However, Bullock warned that if inflation falls more quickly than anticipated the RBA does not need to wait for inflation to be inside the target to cut rates.

NZD/USD edged higher on a more favorable New Zealand economic outlook. The ANZ consumer confidence index surged 9 points in November to 91.2, the highest since September 2021, driven by rises in both the current and future conditions indexes. Still, consumer confidence remains below the 20-year average of 114.0, leaving scope for the RBNZ to deliver another 50bps rate cut in February, as per its guidance.

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