US FX WRAP: Dollar bid amid rising US yields, while Yuan and Antipodes gain on improved China sentiment

Analysis details (20:54)

The Dollar Index opened the week on a firmer footing, with gains largely stemming from Yen weakness (higher US yields weighed) and modest EUR downside ahead of the ECB's meeting on Thursday. Data releases and Fedspeak were thin to start the week, although, the latest NY Fed SCE saw the 1yr, 3yr, and 5yr inflation expectations rise, as well as respondents who expect a better year-ahead financial situation, hitting the highest level since February 2020. The key focus will be on US CPI on Wednesday, which will help shape expectations for the rate path ahead. On Tuesday, Labour Costs and Productivity revisions for Q3 are due, alongside the NFIB Business Optimism Index.

G10 FX performance was mixed, with gains seen in Antipodes, and GBP to a lesser extent, whereas JPY was hit, and CAD, CHF, and the Euro incurred modest downside. Direct newsflow was sparse in the space, with EUR awaiting the upcoming ECB meeting (exp. ~83% chance of  25bps cut). However, a steeper-than-expected decline in the EU Sentix index briefly weighed on EUR/USD. In the meantime, Germany's Final CPI revisions are due. For an ECB Newsquawk preview, please click here. Elsewhere, higher US treasury yields weighed on JPY, in addition to the risk-on sentiment filed by China's Politburo (detailed in EMFX), thus, causing USD/JPY to rally above 151, with the 50DMA (151.48) and 200DMA (151.98) nearing, despite GDP metrics being revised upwards in Q3. Separately, XAU caught a bid on Monday, helped by the aforementioned Politburo news, and China resuming its gold Purchases in November after a six-month pause.

Antipodes were the beneficiaries of Politburo's commentary, with the risk-on trade allowing AUD/USD to climb above 0.64 to a peak of 0.6471, with the 21DMA (0.6486) approaching on the upside. The Aussie will remain a key focus heading into overnight trade where the RBA is expected to keep the cash rate unchanged at 4.35% (~9% chance of a 25bps cut). Attention will linger into the post-presser conference where Governor Bullock will speak; last time she said rates need to stay restrictive for the time being, and there are still risks on the upside for inflation. For a Newsquawk RBA preview, please click here.

EMFX: The Yuan was firmer against the Dollar as sentiment rebounded concerning stimulus measures, while the latest CPI metrics were cooler than expectations, and the PPI showed less deflation than was forecasted. The Politburo said China's fiscal policy is to be more proactive next year, and monetary policy is to be moderately loose (prev. prudent), marking the first shift in the stance of monetary policy since 2011; remarks precede the upcoming Central Economic Work Conference later this week, where the leadership will agree on the key economic targets and priorities for next year. That said, folks at CapEco caution against interpreting this as confirmation that large-scale stimulus is on its way. "Because the official language on monetary policy changes so infrequently, it is hard to use history as a guide to what it means in practice." More fundamentally, we think monetary easing in China is far less potent than it used to be. "In the past, demand for credit outstripped supply, making it straightforward for the PBOC to boost credit growth by cutting policy rates". By contrast, there is now limited appetite among households and large parts of the private sector to take on more debt, even at lower rates." Next on the docket is the Import/Exports for November.

In LatAm, MXN lagged the CLP and COP amid Mexcio's inflation in November being cooler than expected on both the headline and core prints. While in CEE, the CZKs saw modest losses after Industrial Output missed, with the unemployment rate rising to 3.9% as expected. Next in the CEE region, is inflation from Czech and Hungary.

09 Dec 2024 - 20:54- Fixed IncomeData- Source: Newsquawk