Photo by Alicia Razuri on Unsplash
 

Overview: The reassessment of the outlook for next month's FOMC meeting, spurred by comments before the weekend by the NY Fed president has been sustained today but the impact on the dollar is not so clear. The greenback is mixed, with the European currencies, for the most part, doing better than the dollar bloc and Japanese yen. Still, broadly consolidative price action has been seen and the G10 currencies are +/- 0.25% against the US dollar in late European morning turnover. Emerging market currencies also are mixed with Asia Pacific currencies, mostly underperforming central European currencies. After missing in action before the weekend, the Reserve Bank of India appears to have intervened to support the rupee after it fell to a record low at the end of last week. The intervention appears to have taken place in the onshore and non-deliverable forward market. 

Outside of Tokyo, which is on holiday today, South Korea, and India, most of the large equity markets in the Asia Pacific region rallied today. Last week, the MSCI Asia Pacific Index fell by 3.9%, its largest weekly decline since April. Europe's Stoxx 600 is up about 0.4%, though defense names have been sold amid the heightened prospects for a ceasefire in Ukraine. It lost 2.2% last week. US stocks reversed higher before the weekend, and the S&P 500 and NASDAQ futures are enjoying a firmer tone today. European benchmark 10-year yields are softer by up to almost two basis points. Neither the French budget woes nor Italy's upgrade has had much impact. The 10-year US Treasury yield is near 4.05%. It traded closer to 4.03%, a new low for the month before the weekend. Gold is consolidating within the pre-weekend range and so far, today, is confined to a $4040-$4078 range. January WTI is trading softly after setting a 4 1/2-week low near $57.40 at the end of last week. Last month's low was around $56. 

USD: The Dollar Index traded on both sides of Thursday's range (~100.00-100.35) ahead of the weekend. Although the close was within the range, the price action looks constructive provided it holds above 99.85. It is trading quietly between slightly below than 100.10 and 100.30. NY Fed President Williams' comments before the weekend renewed speculation of a rate cut next month. The odds in the futures market rose to almost 66% before the weekend and a little more today (~69%). the most in two weeks. Today's data, which consists primarily of the Chicago Fed's national survey (Oct) and the Dallas Fed's manufacturing survey (Nov) will not move the needle. Shortly after the European markets close for the day, the Federal Reserve will announce annual revisions to industrial production. Tomorrow's data may be more important even if older (Sept): PPI and retail sales, and house prices. The Conference Board's November survey and the Dallas Fed's service survey and the Richmond Fed's survey will also be reported. 

EURO: The euro also traded on both sides of Thursday's trading range ahead of the weekend. It recorded the session low near $1.1490 in near midday in NY before the weekend. Subsequently, it was not able to trade above $1.1520 and posted a neutral settlement. It is trading with a firmer bias today. It has held above $1.15 (options for ~775 mln euros expire there today and 780 mln euros of options at $1.1520 also expire) and poked above $1.1540. The pre-weekend high was slightly above $1.1550. The November low, the lowest since August 1, was about $1.1470, and a break of that could spur a test on $1.14. Still, the US two-year premium over German sitting on the year's low near 150 bp, the euro may find support. The aggregate date this week is of little importance. Instead, the week is bookended by national data--today's Germany's IFO survey and the inflation figures from Germany, France, and Spain, at the end of the week. In Germany, business expectations have trended higher this year. There have only been two months in the first 10 that improvement was not seen, according to the IFO. And it slipped in November to 90.6 from 91.6, which was the highest since Russia's invasion of Ukraine. The current assessment ticked up for the first time in four months (85.6 vs.85.3). The overall business climate measure stands at 88.1 (88.4 in October). Italy's credit rating was raised by Moody's at the end of last week, but at Baa2, it is one notched below the S&P and Fitch equivalent. Meanwhile, in France, the National Assembly reject part of the 2026 budget over the weekend and this boosts uncertainty ahead of next month's vote. Prime Minister's future hangs in the balance. The failure to find a consensus on the budget toppled the previous two governments. 

CNY: After a few tries to overcome the cap near CNH7.12, the market appeared to "give up," and took the greenback slightly through CNH7.1050 for a new four-day low at the end of last week. Nearby support is seen in the CNH70975-CNH7.10 area. The dollar slipped to CNH7.1030 today before recovering back above CNH7.11. It is consolidating mostly between CNH7.1050 and CNH7.11 in Europe. The dollar's pullback against most currencies before the weekend, and especially against the yen, pointed to the lower PBOC dollar fix today. It was set at CNY7.0847 (CNY7.0875 before the weekend and CNY7.0816, last Monday's fix, which was the lowest since October 2024). Chinese data is sparse this week, with only industrial profits on tap at the end of the week. There has been some improvement recently and may be linked to the efforts to combat "involution" or excess investment. Beijing is reportedly considering new measures to support the property market. Apparently, mortgage subsidies for new home buyers and higher income tax rebates for mortgage borrowers are being discussed. The real estate market bubble was intentionally popped four years ago, and it has weighed on wealth creation, consumption, and employment. There have been several rounds of supportive measures, but the overcapacity was enormous. In turn, bad loans at banks have been rising. In October, Fitch estimated that the bad loans reached a record of CNY3.5 trillion (~$490 bln) at the end of Q3. 

JPY: The dollar snapped a four-day slide at the end of last week, during which the greenback rose from about JPY154.50 to about JPY157.90. Japanese officials issued some verbal warnings and threatened material intervention before the weekend. Tokyo markets are on holiday today, and if intervention is successful when it comes as a surprise, perhaps an opportunity was missed today. Softer US yields and renewed speculation of a Fed cut next month encouraged a short-covering rally that lifted the yen against all nearly all the world's currencies ahead of the weekend. It is trading between about JPY156.35 and JPY156.95 today is consolidative action. The Swiss franc was the weakest of the G10 currencies at the end of last week, and it seemed as if, perhaps, some of the short-yen funding positions were shifted to short franc positions. Some of the weakness of especially the Latam currencies (Brazilian real -1.3%, Colombian peso -1.1%, Chilean peso -1.05% and Mexican peso -0.55%) may have reflected the unwinding of some yen-carry trades. The most important data this week is at the very end: Tokyo CPI, employment, retail sales, and industrial production. Three important issues now are not so much related to the high-frequency data: 1) heightened concern by the government about the yen's weakness while expectations for a hike next month have been downgraded (23% vs. 47% at the start of the month); 2) the government's new JPY17.7 trillion ($112 bln), well above last year's extra budget of JPY13.9 trillion), with anticipation of new supply pushing up bond yields; 3) the heightened tensions with China over the prime minister's recent comments about Taiwan. Not to be lost in the shuffle, but Japan Defense Minister Koizumi confirmed plans to re-position more missile to its southern island of Yonaguni, which is less than 70 miles from Taiwan. 

GBP: Attention is squarely on the Chancellor's budget on Wednesday. Sterling carved a ledge near $1.3040 in the last three sessions and held above the month's low closer to $1.3010. While we remain mindful of the (50%) retracement of this year's rally near $1.2945, the firm close ahead of the weekend, and its best in three sessions, may a sufficient deterrence for the bears. Sterling edged up a little through $1.3110 today before stalling ahead of initial resistance near $1.3130. A push above $1.3150 may be needed to boost confidence that a low is in place. 

CAD: The greenback faltered ahead of the weekend within spitting distance of the seven-month high recorded earlier this month near CAD1.4140. Was this a failed test? Will it leave a double top in its wake that could have a measuring objective near CAD1.3800? That is why the price action in the next few days is important. It has traded between about C AD1.4090 and CAD1.4115 so far today. A break of the CAD1.4050-70 area helps, but a move below CAD1.4035 would boost confidence that a high is in place. 

AUD:  Before the weekend, the Australian dollar recovered from near a three-month low (~$0.6420) to a session high of about $0.6460, around where the 200-day moving average was found. It settled about 0.30% higher, making it the biggest gain in nearly two weeks. It marginally extended the gains today to $0.6470 and was unable to test the important band of resistance ($0.6500-$0.652) before being sold back to nearly $0.6440. Australia reports October CPI tomorrow. It jumped from 1.9% in June, its lowest in a little more than four years, to 3.5% in September. It stood at 2.1% in September 2024. In addition, labor market conditions have improved recently. Even if the October CPI slips a little it will not renew speculation of a rate cut next month. The Reserve Bank of New Zealand meets Wednesday, and a quarter-point cut is the most likely outcome. 

MXN: The dollar reached a two-week high near MXN18.5330 amid the risk off of stocks tumbled early last Friday. As equities recovered, the dollar surrendered some of its early gains. However, it remained firm and still posted its highest settlement and the first above the 20-day moving average in two weeks. If it is not the risk environment per se, perhaps it was the drag of unwinding short yen carry trades. With the pre-weekend gains, the dollar recouped half of what it lost since peaking near MXN18.77 on November 5. The next retracement objective (61.8%) is around MXN18.5730. The dollar is consolidating today between MXN18.4150 and MXN18.4950. Mexico reports CPI for the first half of November today. The headline is seen rising more than the core rate, but the year-over-year measures likely remain little changed at about 3.50% and 4.30%, respectively but a rate cut next month remains likely. 

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