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Overview: The dollar is on fire. Ahead of today's US November CPI and tomorrow's anticipated rate cuts by the European Central Bank and the Swiss National Bank, the greenback is rising against all G10 currencies and nearly all emerging market currencies (but the Hong Kong dollar and the Indian rupee, which slipped to a record-low earlier today). There is a press report claiming that Beijing is considering allowing the yuan to fall further but it is not clear what this means in a strong US dollar environment. China's 10-year yield is uncharted waters near 1.80% and additional monetary easing is expected. The yuan is off 2.3% this year against the dollar, making it among the strongest currencies in the world. Ahead of today's CPI, the futures market has about an 85% chance of a Fed cut next week and has 100 bp of cut discounted between now and the end next year, which is about a quarter-point less than the median Fed dot in September. 

Equities were mixed in the Asia Pacific area after US indices fell yesterday. Europe's Stoxx 600 snapped an eight-day advance yesterday and is flat now, seemingly waiting for US leadership. US index futures are slightly firmer. European 10-year yields are mostly softer, and Italian, Spanish, and Greek benchmark yields are at three-month lows. The 10-year US Treasury yield is firm near 4.23%. It has risen the past two sessions after finishing last week near 4.15%. Gold met some sellers when it poked above $2700 for the first time in around two-and-half weeks. It pulled back to about $2675 and approached the high again in the European morning before consolidating. Reports suggesting that the Biden administration is considering new sanctions on Russian oil may be lifting January WTI today. It approached $67 a barrel Monday and is near $69.20 now. 
 

Asia Pacific

There are four issues in the Asia Pacific region. First, the Bank of Japan meets next week. Speculation of a rate hike has shifted toward a move in January. The swaps markets had about a 2/3 chance of a hike discounted for next week at the end of November, but this has fallen to less than 20%. There is some talk that officials could wait beyond January, but the odds of a January hike are little changed this week, with more than 17 bp discounted. The rise in producer prices, reported earlier today at 3.7%, stronger than expected and the highest since the middle of last year illustrate the pressures. Second, following yesterday's Reserve Bank of Australia meeting, the market is more confident of a rate cut at the next meeting (February 18). In the futures market, the probability of a cut in February is near 66%, twice what it was at the end of last month. The swaps market is discounting between 75 bp and 100 bp of cuts next year. Third, China’s Politburo promised more measures to support the economy and there is speculation that Beijing may allow a 4% central government deficit in 2025, up from 3%. However, investors got excited about the flurry of measures announced in Q3, only to be disappointed. As the real sector economic reports next week will likely show, the economic impact has been marginal at best. Meanwhile, news that the PBOC bought gold last month for the first time since April is helping the yellow metal recoup some recently lost ground. The PBOC bought 160k ounces of gold, according to press reports. In April, it bought 60k ounces. Reuter reports today that Beijing is considering letting the yuan depreciate quicker ostensibly to blunt the anticipated impact of the tariffs threatened by the incoming US administration. Fourth, after last week's turmoil, South Korean capital markets are stabilizing. The Kospi is up for the second straight session, for the first time this month. The won remains weak in the strong US dollar environment but is has held above last week's two-year low. 

The dollar is trading at a new two-week high in the European morning near JPY152.80. It is rising for the third consecutive session and is above the 20-day and 200-day moving averages (~JPY152 and JPY152.50, respectively). A small rise in US rates and a shift in expectations away from a BOJ rate hike next week and into January weighed on the yen. The next target is the JPY153.60 area, which is the (61.8%) retracement of the decline since November 15 high (~JPY157). The Australian dollar has been unable to recover from the central bank's dovish hold on Tuesday. It recorded the session low in North America near $0.6365 and follow-through selling has sent the Aussie to a new low for the year near $0.6335. Some selling may have been related to the A$900 mln options at what had been the low for the year, $0.6350. The 2022 low around $0.6270 may be the next target. The greenback recovered from a seven-day low against the offshore yuan (~CNH7.2420) scored in the local session yesterday to reach almost CNH7.2650 before European centers closed. Its recovery was extended to CNH7.2920 today, slightly shy of Monday's higher. Last week, the dollar peak near CNH7.3150. China's 10-year discount to the US is approaching the record set near 225 bp eight months ago. Ultimately, in our understanding of what drives the exchange rates, this is more significant than China's trade surplus that is approaching $100 bln a month. The PBOC set the dollar's reference rate at CNY7.1843 (CNY7.1896 yesterday). 
 

Europe

Tomorrow's CPI is unlikely to deter Sweden's Riksbank from cutting rates when it meets next week. Poor Swedish production and consumption data for October reported yesterday warns that the economy continues to falter. The Riksbank began easing in May with a quarter-point cut and delivered two more before cutting 50 bp last month. The policy rate stands at 2.75%. The swaps market has about half of the cut discounted. Norway reported firm CPI figures yesterday. The underlying rate rose to 3.0% from 2.7%. It is the first increase since October 2023. The headline rate increase of 0.3% was slightly more than expected, as was the year-over-year increase of 2.4%, which still was the slowest pace since the end of 2020. Still, there is little chance that Norges Bank, the central bank, will change policy when it meets on December 19 too. The market has the first cut fully discounted for the end of Q1 25. The market expects the ECB to cut key rates tomorrow by a quarter-point. The updated staff forecasts will likely show lower inflation and weaker growth impulses. The outcome of the SNB meeting remains a close call. The swaps market shows a slightly leaning toward a 50 bp move, while we lean in the opposite direction, given that the deposit rate already sits at 1.0%. 

The euro, which traded as high as $1.0630 after last Friday's US employment report, has fallen to about $1.0485 today. It settled poorly yesterday, below Monday's low. Options for about 2.5 bln euros at $1.0490-$1.0500 expire today. Last week's lows (~$1.0460-70) are the next downside target. The $1.0450 area corresponds to the (61.8%) retracement of the recovery from the November 22 low near $1.0335. In contrast, sterling traded well yesterday. It was the only G10 currency to gain against the US dollar. Still, it traded inside Monday's range but settled near the highs. In fact, sterling posted its highest close (~$1.2775) in a month. However, it has come back offered today and traded at a four-day low in European turnover slightly below $1.2715. Option-related demand offers may have played a role. There are chunky options that expire today at $1.2725 and $1.2745. A break of $1.2685 would confirm a near-term top is in place and spur a move back toward last month's low (~$1.2485). 
 

America

There are two highlights in the North American session today. First is the US November CPI. It has risen by 0.2% in each of the past four months. The median forecast in Bloomberg's survey is for a 0.3% increase in November, which would match the fastest rise since the end of Q1. Given the base effect (0.2% increase in November 2023), the year-over-year pace will tick up to 2.7% from 2.6%. That would be the second consecutive increase. The core rate is a bit stickier. It is expected to have increased by 0.3% for the fourth consecutive month. The year-over-year rate is seen steady at 3.3%. It has not fallen since July and has averaged 3.3% since May  Despite the above average job growth in November and the above 3% growth the economy appears to be tracking here in Q4, and anticipation of the lack of improvement of US consumer inflation, the market remains persuaded that the Fed will cut rates by another quarter-point next week,  Second, the Bank of Canada will cut rates again today. It began the easing cycle in June and delivered three quarter-point cuts before the 50 bp move in October. The market had been leaning toward another 50 bp cut but the jump in the unemployment rate to 6.8% (from 6.5%), and despite the strong full time job creation (54.2k and the most in a three-month period since January 2023), boosted confidence (85%). A half-point cut will bring the target rate to 3.25%. The swaps market sees it between 2.50% and 2.75% at the end of next year. 

Ahead of today's Bank of Canada meeting, the US dollar rose to a new four-and-a-half year high against the Canadian dollar yesterday, slightly shy of CAD1.4200. It is still pressing against it now. I The US two-year premium over Canada rose a handful of basis points yesterday to 126 bp, the most since 1997. There are options for almost $305 mln at CAD!.4250 that expire today and $1.2 bln at CAD1.4230 that expire tomorrow. The greenback rose to a four-day high of about MXN20.3275 before reversing yesterday. It fell slightly through MXN20.15 and settled near session lows. Mexico's inflation was softer than expected and boosted confidence that Banxico would cut rates next week. The dollar is trading firmer and is above MXN20.23 in Europe. Latam currencies were three of the top four emerging market currencies yesterday. The Brazilian real's 0.55% rise topped the leaders' board followed by the Mexican peso's 0.45% gain. The Hungarian forint squeezed into third place with a 0.2% gain. The Peruvian sol was in a fourth place, with slightly less than a 0.2% rise. 

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