The broad dollar rally continued last week. CHF, GBP, and SEK outperformed while NZD, AUD, and JPY underperformed. Contrast the Fed’s hawkish cut with dovish holds from the BOJ and BOE last week, as well as recent rate cuts from the SNB, BOC, Riksbank, Mexico, and Colombia. With monetary policy divergences still widening, the dollar rally is likely to continue well into 2025.
AMERICAS
Monetary policy divergences continue to favor the dollar. Contrast the Fed’s hawkish cut with dovish holds from the BOJ and BOE last week, as well as recent rate cuts from the SNB, BOC, Riksbank. It’s not just DM, as EM central banks in Colombia, Mexico, Chile, the Philippines, and others continue to ease. With monetary policy divergences still widening, the dollar rally is likely to continue well into 2025.
Recent data support a more cautious Fed stance in 2025. Growth remains robust while inflation remains stubbornly high. The Atlanta Fed GDPNow model has Q4 growth at 3.1% SAAR and will be updated Tuesday after the data. Elsewhere, the New York Fed's Nowcast model is tracking Q4 growth at 1.9% SAAR and Q1 growth at 2.1% SAAR and will be updated Friday. Of note, the Cleveland Fed's inflation Nowcast model has December headline PCE at 2.6% and core at 2.9%.
A U.S. government shutdown was avoided. After both houses of Congress passed the stopgap funding bill late Friday, President Biden signed off on it early Saturday. It will keep the government funded through March, which means President-elect Trump will have to deal with shutdown risks himself after he and his advisor Musk inserted themselves into the debate ahead of the deadline.
Chicago Fed National Activity Index for November will be reported Monday. Headline is expected ta -0.15 vs. -0.40 in October. If so, the 3-month moving average would rise to -0.27 vs. -0.24 in October. While this would be the lowest since October 2023, the average would still be well above the -0.70 threshold that typically signals recession.
Conference Board consumer confidence for December will also be reported Monday. Headline is expected at 113.0 vs. 111.7 in November. If so, it would remain within the same narrow range that’s held throughout the past two years. Positive U.S. real wage growth, encouraging labor demand, and strong household balance sheets suggest household spending will remain an important tailwind to GDP growth. Watch out for the labor index (jobs plentiful minus jobs hard to get). In November, that index rose to a five-month high of 18.2, suggesting consumers are more optimistic about future labor market conditions.
Regional Fed surveys will continue to roll out. Philly Fed non-manufacturing survey as well as Richmond Fed manufacturing and non-manufacturing surveys will all be reported Tuesday.
Bank of Canada release its summary of deliberations Monday. At the December 11 meeting, the bank cut rates 50 bp to 3.25% but toned down its easing guidance by noting that it has “reduced the policy rate substantially since June. Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time.” Previously, the BOC warned that “we expect to reduce the policy rate further.” Still, we believe the BOC has room to ease further, which should limit USD/CAD pullbacks. Inflation is close to 2%, inflationary pressures are no longer broad-based, and the growth outlook is soggy. This means the BOC can afford to move the policy rate within its neutral range estimate between 2.25-3.25%. Of note, the swaps market now sees the policy rate bottoming at 2.75%.
Canada data highlight will be October GDP Monday. Consensus sees 0.2% m/m vs. 0.1% in September, while the BOC estimates 0.1% m/m. The central bank’s November GDP estimate will be published at the same time.
EUROPE/MIDDLE EAST/AFRICA
U.K. highlight will be revised Q3 GDP data Monday. Growth momentum cooled more than expected in Q3. Real GDP rose 0.1% q/q vs. 0.5% in Q2. Consensus and the Bank of England (BOE) had penciled in a 0.2% q/q increase. Going forward, leading indicators point to a modest pick-up in economic activity but more pockets of softness are popping up. Indeed, we believe this was behind the BOE’s dovish pivot last week despite stubbornly higher inflation. Market sees only 70% odds of a cut at the next meeting February 6 but it will all come down to the data between now and then.
ASIA
Bank of Japan publishes the summary of options from last week’s meeting Friday. It delivered a dovish hold. The vote was 8-1, with the lone dissent Tamura in favor of a 25 bp hike to 0.50%. The bank noted that uncertainties remain high for the economy and inflation and added that FX developments are more likely to affect prices than in the past. Governor Ueda reiterated the bank will continue to raise rates if the outlook for economic activity and prices is realized. However, Ueda indicated that the BOJ is in no rush to resume normalizing rates as “It will take a long time before the full picture is clear for both the spring wage negotiations and the Trump administration’s policies.” Ueda added that the big picture on wages should be clearer by March or April, suggesting the BOJ could wait until then to raise rates again. The odds of a hike at the January 23-24 meeting have fallen below 45% vs. 70% at the start of last week, while the first hike is not fully priced in until May.
BOJ also publishes the minutes of the October meeting Tuesday. At that meeting, the BOJ decided by a unanimous vote to leave the policy rate unchanged at 0.25% and reiterated its cautious tightening bias that if the “outlook for economic activity and prices will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.” However, Governor Ueda acknowledge that markets have slowly regained stability and risks related to the U.S. economy is lower than before. Previously, Ueda warned of ongoing financial instability in the market.
BOJ Governor Ueda delivers a speech Wednesday. At last week’s meeting, Ueda Indeed, Governor Ueda suggested that the BOJ could wait until spring to raise rates again as wage trends will be clearer by then. We expect him to maintain this dovish tone.
December Tokyo CPI will be reported Friday. Headline is expected at 2.9% y/y vs. 2.65 in November, core (ex-fresh food) is expected at 2.5% y/y vs. 2.2% in November, and core ex-energy is expected to remain steady at 1.9% y/y. If so, Tokyo core would be the highest since February. However, We doubt the data will move the needle on Bank of Japan (BOJ) rate expectations after the BOJ signaled that it is in no rush to resume normalizing rates.
November labor market and real sector data will also be reported Friday. The unemployment rate is expected to remain steady at 2.5% while the job-to-applicant ratio is expected to remain steady at 1.25. IP is expected at -3.1% y/y vs. 1.4% in October, retail sales are expected at 1.5% y/y vs. 1.3% in October, and housing starts are expected at -0.3% y/y vs. -2.9% in October.
RBA publishes the minutes of the December meeting Tuesday. At that meeting, the RBA delivered a dovish hold. The RBA kept the cash rate target at 4.35% but set the stage for a policy rate cut in February. First, the RBA scrapped its previous neutral policy guidance that “the Board is not ruling anything in or out”. Second, the RBA noted “the Board is gaining some confidence that inflation is moving sustainably towards target”, adding that “some of the upside risks to inflation appear to have eased.” Previously, the RBA warned of “the need to remain vigilant to upside risks to inflation.” Meanwhile, RBA Governor Michele Bullock reiterated the Board did not explicitly discuss interest rate cut or raising rates either, and declined to lay out a scenario for a February rate cut. The market sees about 65% odds of a 25 bp cut at the next February 18 meeting and becomes fully priced in for the April 1 meeting.
