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Overview: The US dollar is mixed against the G10 and emerging market currencies to finish out the week. Among the G10, sterling and the yen are the heaviest. Japan's Tankan survey was unimpressive and does nothing to reanimate speculation of a BOJ rate hike next week. Sterling has been dragged down by unexpected news that the economy contracted in October for the second straight month. The euro is being aided by the unwinding of cross positions against sterling, and this is helping lift the central European currencies among the emerging market complex. The Canadian dollar extended its losses to a marginal four-year low. 

Asia Pacific and European equities are weaker, but the index futures in the US are pointing to a firm start. Japan tumbled nearly 1%, while Hong Kong and China indices were off more than 2%. India bucked the tide and gained almost 1%. Europe's Stoxx 600 is off for the second consecutive session. US index futures are around 0.25%-0.50% higher. Meanwhile, European bonds continue to sell-off, lifting yielding 1-2 bp more than yesterday. On the week, most benchmark yields are up 10-15 bp as are 10-year US Treasury yields (+13 bp). Gold is extending yesterday's losses. In the first three days of the week, gold rallied about $85, and between yesterday and today, has given back around $52. January WTI is firm near $70.80, around the best levels since late November. Nearby potential may exist toward $71.50-$72.00. 
 

Asia Pacific

Japan's Tankan survey was little changed from the Q3 iteration. Although the survey is often seen as an important read on Japanese business sentiment, it has little policy implication. The Bank of Japan meets next week. As recently as a week ago, the swaps market was discounting a 15 bp hike, but news that a deputy governor has scheduled a speech next month was seen as an opportunity to prepare the market in a way that has not been done for next week's meeting. The swaps market now has about four basis points of tightening discounted for next week and 18 bp for next month. Meanwhile, China's officials said all the right things coming out of the Central Economic Work Committee, including "lifting consumption vigorously" and stable prices and employment, and a boost in the central government's deficit. So far, the public statements have been light on details, though there is a mention of a special campaign to boost consumption. Since September, Beijing has announced numerous measures to support the economy, but the impact so far seems muted. There is a large maturity of borrowings from the PBOC though various facilities that come due in the coming weeks, and a cut in reserve requirements may help smooth the repayment. 

Although the US 10-year yield rose for the fourth consecutive session, the dollar snapped a three-day advance against the yen yesterday. It consolidated in the upper end of Wednesday's range (~ JPY151.00-JPY152.80) and held above JPY151.80. Follow-through buying today lifted the dollar to almost JPY153.50. The (61.8%) retracement of the dollar's decline since November 15 post-election high (~ JPY156.75) comes in near JPY153.65. The dollar enjoys solid momentum, and the five-day moving average is set to cross above the 20-day moving average. Moreover, the "golden cross" will take place next week, when the 50-day moving average crosses above the 200-day moving average. The strong jobs report yesterday saw the Australian dollar test the (50%) retracement of this month's decline (near $0.6430). The Aussie stalled and slipped back toward the session lows (~$0.6360) in the North American session. It is consolidating quietly today (~$0.6355-$0.6380). Options for A$680 mln expire Monday at $0.6350. The Aussie looks poised to retest Wednesday's low, which is also the year's low, slightly above $0.6335. A convincing break targets last year's low around $0.6270. The markets greeted news from China's central economic work conference that Beijing will commit itself to lifting consumption, investment returns, and domestic demand. Yet, this is nearly the same pledge made in 2022 ("expand domestic demand and prioritize consumption"). The offshore yuan continues to consolidate mostly inside Wednesday's range, (CNH7.2425-CNH7.2920), like the yen yesterday, and similarly, the consolidation looks dollar-friendly. The PBOC set the dollar's reference rate at CNY7.1876 (CNY7.1854 yesterday). 
 

Europe

The UK economy unexpectedly contracted in October, for the second consecutive month, sending sterling lower. The economy contracted by 0.1%, the same as in September. Nearly all the sectors did worse than expected, with industrial and construction output contracting, services stagnating, and the trade deficit worsening. Ahead of the BOE's meeting on December 19, the UK updates its employment report and prices (CPI and PPI). Data dependent as the central bank may be, there is little chance of cut next week. The swaps market has two basis points discounted. Still, there is about an 85% chance priced into the market for a cut at the next meeting in February. The swaps market is discounting 80 bp of cuts next year, while BOE Governor Bailey suggest there may be scope for 100 bp reduction. The ECB did not disappoint. It delivered the fourth quarter-point cut of the year and signaled that the easing cycle would continue into next year but shaving growth and inflation forecasts. Ironically, assuming the Fed cuts its target by 25 bp next week, as widely expected, though the compelling case for it continues to escape us, it would mean that the Fed and the ECB both cut rates by 100 bp this year. The swaps market discounts about 125 bp of easing from the ECB in 2025 and a little more than 75 bp from the Fed. 

In response to the dovish cut by the ECB, the euro has been sold, recording a low today slightly below $1.0455, but a little above the (61.8%) retracement of the gains from the year's low November 22. Options for 4.7 bln euros at $1.04 expire today but are too far away now to be relevant as the euro has found a bid in the European morning lifted it to almost $1.05, where sellers may lurk. The euro has a five-session drop in tow and the bears have the wind to their backs. Sterling posted an outside down day by trading on both sides of Wednesday's range and settling below Wednesday's low. The disappointing GDP sent sterling to almost $1.2620 today, the lowest level December 2. It held above the (61.8%) retracement target of the bounce since November 22, near $1.2610. The price action lends credence to our suspicion that sterling's bounce is over and that is will likely head by toward last month’s low, a little below $1.25. 
 

America

US import/export prices do not capture the imagination of market participants, and those reports are the highlights of today's North American session. Despite the strong dollar, import prices are expected to have risen by 1% year-over-year, which would be the largest increase since July. Export prices are expected to have snapped a three-month negative year-over-year run. It would be the first positive reading since July. Yesterday's PPI was higher than expected and the revisions to the October series were higher. The CPI on Wednesday was in line with expectations, but the deflation in core goods seems to be ending. The 0.3% increase was more than the gain of the previous two months combined. What has been dubbed the "super core services" which excludes housing from the core measure stands at 4.25%. It may be the lowest for the year but indicates it is not simply shelter costs that are keeping inflation elevated. Still barring a press report, like happened in September, during the Fed's quiet period that helped prepare the market for the 50 bp cut, a quarter-point cut next week is the most likely scenario. We do not see the compelling case and suspect that the yield curve will steepen in response. Mexico's disappointing October industrial output report yesterday (-1.2% vs. the median forecast in Bloomberg's survey for a 0.2% decline) solidifies expectations for the Banxico to cut rates next week. 

Pressure on the Canadian dollar continues. It has fallen in seven of the past nine sessions. The greenback rose above CAD1.4200 for the first time since April 2020 and reached almost CAD1.4250 today. It has not been this high since the pandemic in 2020, when it peaked around CAD1.4670. With spot trading at levels not seen in some time, implied volatility is rising. Benchmark three-month implied volatility is near its best level since early this year, approaching 6%. A four-year low was seen as recently as July (slightly below 4.6%). A dreadful industrial production report from Mexico (-1.2% in October vs. median forecast in Bloomberg's survey for -0.2%) encouraged the selling of the peso yesterday. It suffered its largest decline in a little more than two weeks. Coming on the heels of the softer than expected CPI at the start of the week, there is little doubt that the central bank will cut rates by at least 25 bp next week. The swaps market was discounting a target rate of about 8.55% (10.25% now) at the end of next year. Still, the greenback continues to trade mostly inside Wednesday's range yesterday (~MXN20.10-MXN20.26). We suspect the dollar has forged a base and can work its way back into MXN20.30-33 area. Meanwhile, the greenback was initially sold to a little below BRL5.87 yesterday in response Brazil's central bank 100 bp hike and promise of two more of the same magnitude at the next two meetings. However, an important drag on the real comes from fiscal policy concerns, and news that despite age and health issues, Lula intends to run for re-election in 2026 renewed pressure on the real. The dollar settled slightly below BRL6.0. This week's high is near BRL6.09. The record high was seen at the end of last month around BRL6.1150. 

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