The Swiss National Bank and the Bank of Canada delivered 50 bp rate cuts last week, and the European central bank cut by a quarter-point. The monetary easing cycle looks set to carry into next year. The Reserve Bank of Australia remains on hold and a stronger than expected employment report dampened speculation of a cut in Q1 25. The US CPI was in line with expectations. With the headline rising for the second consecutive month, and alongside the PPI components, the PCE deflator is also expected to rise. The improvement from a year ago is minor. The UK economy, we learned, unexpectedly contracted in October. 

Still, the market is convinced the Federal Reserve will cut rates at the conclusion of the FOMC meeting on December 18. We suggest the risk of a "hawkish" cut with less rate hikes next year than anticipated in September in the Summary of Economic Projections (dot plot), recognition that economy is stronger than it had expected previously, and inflation is on a bumpy path that allows the Fed to be patient. Speculation that the Bank of Japan could hike next week has faded and January is seen as the more likely timeframe. The Bank of England meets as well. Although the economy contracted in both September and October, and the central bank says it is data dependent, a rate cut on December 19 would be a surprise. The BOE governor suggested 100 bp of cuts may be appropriate next year, but a case can be made for another cut now. Sweden and Norway's central banks meet. The former is likely to continue its easing course with a quarter-point cut, while the latter is on hold well into next year. Moderating inflation and weakening economic impulses means that the central bank of Mexico will cut rates by a quarter-point for the fifth time this year. Colombia's central bank will continue its easing cycle, with a 50 bp cut, while Chile proceeds with a quarter-point cut. 

United States:  By the Fed Chair's own admission, the US economy is stronger than officials thought in September, when they cut rates by 50 bp and signaled the likelihood of two more quarter point cuts this year. Jobs growth bounced back after the recent weather distortions, the revisions were better and average hourly earnings rose. The unemployment rate ticked up but at 4.2% it is the average here in H2. The Atlanta Fed's GDP tracker points 3.3% growth this quarter, and last week, we learned that the headline CPI rose for the second consecutive month. After the PPI, economists are projecting that the headline PCE deflator, which the Fed targets, will rise to 2.5% from 2.3%. It will be released after the FOMC at the end of next week. In November 2023, it stood at 2.7%. Data ahead of the FOMC meeting are likely to show solid retail sales and a recovery in industrial production. Fed officials will update the Summary of Economic Projections (dot plot). In September, the median projection was for 100 bp of cuts in 2025. Given the high probability the market is assigning to a rate cut this week, the pricing in the Fed funds futures show about 75 bp next year. We suspect the median Fed dot will be less. This set stage of a "hawkish" cut, in which the continued strength of the economy and bumpy price pressures mean less rate cuts next year and not pushing against ideas of a pause early next year.

Ahead of the weekend, the Dollar Index consolidated after meeting the (61.8%) retracement objective of its losses from the year's high set November 22 a little above 107.00. Downside potential ahead of the midweek FOMC meeting may extend toward 106.20. However, sentiment toward the dollar remains constructive and surveys show bullish outlooks for next year. The cyclical high was recorded in September 2022 near 114.80. The 109.00 area corresponds to the (61.8%) retracement of the subsequent decline and may offer a reasonable target for early 2025. 

Japan: Growth in the world's third largest economy has been volatile. After rising at an annualized rate of 0.4% in Q4 23, the economy contracted by 2.4% in Q1 24 and rebounded 2.2% in Q2. It expanded by almost 1% in Q3, and barring a new natural disaster or industry scandal, the economy looks to be settling into a path of around 1%. That itself is remarkable given the shrinking population. The BOJ meeting that concludes on December 19. As there does not appear to be a compelling case for the Fed to ease, there does not appear to be a compelling case for the BOJ not to hike. The overnight target is at 0.25%. November's CPI will be reported the day after the BOJ meeting concludes but the Tokyo report, which contains the signal, warns of a rise due to the timing of energy subsidies. Tokyo's CPI rose to 2.6% from 1.8% and the core rose to 2.2% from 1.8%. The measure that excludes fresh food and energy edged up to 1.9% from 1.8%. The national CPI tends to run a little hotter than Tokyo. That the real policy rate remains so deeply in negative territory illustrates why Japanese official complaints about the yen's weakness draw little sympathy. Given the pricing in the swaps market, a hike on December 19 would likely be disruptive, and hence, unlikely given the turmoil in July. 

The US 10-year yield rose every session last week as did the dollar against the yen. The greenback's gains to JPY153.80 before the weekend met the (61.8%) retracement objective of the decline from the November 15 high (~JPY156.75). The US 10-year yield approached 4.40% ahead of the weekend its highest level since November 22. he momentum indicators have turned higher. The next important technical area in JPY154.80-JPY155.00, and the trendline connecting the year's high from July and last month's high comes in near JPY155.40 at the end of next week. 

UK: What does it mean that the Bank of England policy is data dependent? Ahead of the weekend officials learned that the economy unexpectedly contracted in October for the second consecutive month. Officials will have in hand an updated employment and CPI report when it meets on December 19. Yet, nearly regardless of the actual outcome, there is practically no chance of a change in BOE policy. This means the bank rate will finish the year at 4.75%, 50 bp lower than at the end of last year, following the quarter-point cuts in August and November. Bank of England Governor Bailey suggested there may be scope for 100 bp of cuts next year, and the swaps markets has around 80 bp of cuts discounted. The 10-year Gilt yield has unwound the surge seen in response to the government's budget, which saw it jump to 4.60% from 4.20%. It has risen this month and is in the middle of the range. Its yield is nearly twice the 10-year Bund yield, and near 220 bp, is most since Gilt crisis in September 2022. 

Sterling reached its best level against the euro since April 2022 in the middle of last week before turning lower, especially after the disappointing October GDP. The euro reached GBP0.8225 at the low and finished the week meeting the (38.2%) retracement of the losses of last leg down beginning at the start of November and pushed above the 20-day moving average slightly(~ GBP0.8300) ahead of the weekend. The next technical objective is the in the GBP0.8350-60 area. Cable looked ugly at the end of last week. It posted an outside down day before the poor GDP news. Follow-through selling took it to almost $1.2600, ahead of the weekend, meeting the (61.8%) retracement of the bounce from the November 22 low (~$1.2485).  Nearby support ahead of that low may be around $1.2565.  

Sweden and Norway: The central banks meet on December 19. Sweden has eased aggressively this year, while Norway has stood pat. Sweden's economy is weaker and inflation is lower. The Riksbank delivered its first cut in May, a quarter-point reduction. It delivered two more quarter-point cuts before it reduced the policy rate by 50 bp last month (to 2.75%). Headline inflation was 1.6% in November and he underlying rate was 1.9%. The swaps market has almost a 50% chance of a 25 bp cut, but of the 11 economists surveyed by Bloomberg, all but one expect a cut. The Riksbank meets next in late January, and the market has a little more than a 50 bp cut discounted. Norway's Norges Bank has signaled it does not intend to cut rates now. The higher-than-expected underlying inflation last week spurred speculation that the first rate cut may come later than previously thought. The policy rate is at 4.5%. Headline CPI was 2.4% in November and the underlying rate was 3.0%. In the swaps market, the odds of a cut next month were cut almost in half to near 30% and for the first time in a little over a month, a cut is not fully discounted by the end of Q1 25. 

Paradoxically, despite the Riksbank being one of the most aggressive G10 central banks in cutting rates this year, and Norges Bank among the least, the Swedish krona has outperformed the Norwegian krone, albeit marginally. The krona is off about 8.3% against the dollar this year, while the krone has fallen by around 8.8%. The dollar set the year's high against the Swedish krona on November 22 (~SEK11.18). It set a low in early December near SEK10.83 and is consolidating. There looks to be scope for initial dollar losses before advance continues. The greenback continues to bump up against the high near NOK11.20. The price action looks similar to what a quiet defense of the currency would look like. 

Eurozone: With the ECB rate cut behind us and the other central bank meetings this week, the eurozone not center stage this week. The preliminary December PMI poses headline risk, but the real driver of the exchange rate this week, it is not. The FOMC is key. European politics remain dramatic. Le Pen is pushing for a slower deficit reduction, which could mean greater tensions with the EC. Macron has appointed a new prime minister (Francois Bayrou), unless there is a substantive change in the budget, he may have the same fate as Barnier. In an unscheduled announcement, Moody's cut France's sovereign rating to Aa3  from Aa2, which is a catch-up move, matching S&P and Fitch's AA- rating. Meanwhile the German government faces a confidence vote on December 16, which it will fail, leading to new national elections in mid-February. 

The euro recorded lower highs and lower lows each session last week. Still, it managed to snap a six-session drop ahead of the weekend. Cross-rate demand may have helped steady it against the dollar. The pre-weekend low (~$1.0455) was slightly above the (61.8%) retracement of the bounce from the year's lows (~$1.0335 on November 22). Recall that earlier in December, the euro traded to $1.0635, which meant it that recouped half of the post-US election losses. The euro could not sustain the move above $1.06 and now it is struggling to sustain a foothold above $1.05. It has settled below a hundredth of a cent above it before the weekend, for the first time in three sessions. There may be some upside potential before the FOMC meeting, but it looks limited. 

China: Beijing's efforts to support the economy are beginning to have some impact on activity. This should be evident in November real sector data due in the coming days. Still, officials will not be satisfied and there is still scope for more monetary support in the form of lower rates and a reduction in reserve requirements. Some observers argue that China would offset an increase in US tariffs with currency depreciation. While it is possible, especially if the US dollar appreciates broadly, it seems that Beijing still prefers a fair stable exchange rate and push back more directly against unfriendly policies. Its ban on exports of some dual-purpose critical minerals to the US. It also, for the first time, bars third parties from shipping them to the US as well. It is challenging to understand what Chinese officials are thinking but it seems reasonable that they are concluding the best way to strike a deal, even if agreement to disagree, is to be resolute and strong rather than supplicant, or "turn the other cheek" as the IMF and G7 advised. Beijing says it will abandon export tax subsidies and abolish all tariffs on goods from the poorest countries. 

The dollar did not rise every day last week against the offshore yuan as it did against the yen. Still the dollar rose against both for the second consecutive week. The greenback settled at its best level since December 3 ahead of the weekend (~CNH7.2850). The PBOC continues to set the dollar's reference rate well below prevailing rates, which is a powerful limit on the dollar's rise/yuan's decline. In understanding drivers of exchange rates, we tend to emphasize the movement of capital especially for large modern economies. That means that China's nearly 260 bp discount to the US 10-year Treasury (the most in a decade) and lackluster equity market performance (CSI 300 up less than 0.5% this year) is more significant that its large trade surplus in understanding the yuan. The offshore yuan makes an attractive funding currency for some market participants. 

Canada: The strongest three-month rise in full-time positions (~192k) since January 2023 was not sufficient to deter the Bank of Canada from delivering its second consecutive half-point cut last week. November's CPI, due December 17, is expected to show a moderation in price pressures. A flat month-over-month report would see the year-over-year rate dip back below 2.0%. Recall, headline inflation fell from 2.9% in May, matching the year's high, to 1.6% in September, before recovering to 2.0% in October. In November 2023, Canada's CPI was 3.1%. The underlying core measures are expected to have softened, as well, after rising for first time since May. October retail sales will be reported at the end of the week. Retail sales fell by an average of 0.3% a month through H124 but surged 0.6% a month in Q3. The median forecast in Bloomberg's survey is for a 0.7% increase in October. Separately, foreign appetite for Canada's stocks and bonds in the first three quarters appears to be running at a record pace of about C$142 bln. The October figures may show the pace has been sustained. 

The US dollar reached new four-and-a-half year highs against the Canadian dollar following the rate cut. It approached CAD1.4250 ahead of the weekend. A move above CAD1.4265 targets CAD1.43, but that Covid-high from 2020 was near CAD1.4670. It was not a rates move then, and US and Canadian two-year yield differential had practically disappeared. Now, the US offers 120 bp premium, near the highest since 1997. The five- and 20-day moving averages are trending higher, as are momentum indicators, even if stretched. The greenback is fraying the upper Bollinger Band (CAD1.4240). Initial support may be near CAD1.4200. 

Australia:  The upcoming Australian data, which includes the flash December PMI, consumer inflation and last month's private sector credit, are unlikely to impact expectations for the central bank. The RBA has made it clear that there is still little urgency to cut rates. At the same time, it is no longer discussing the possibility of hiking rates. Since the disappointing Q3 GDP (0.8% year-over-year), the weakest since the end of 2020, was reported on December 4, the futures market has boosted the odds of a cut in April to nearly 90%. The swaps market is discounting almost 75 bp of cut in 2025.

The Australian dollar fell to a new low for the year last week, near $0.6335 on the RBA's seemingly dovish hold. It recovered the following day to almost $0.6430 on the back of a better-than-expected employment report. A wall of sellers greeted it and sent it back to $0.6350. A break could spur losses toward $0.6300, and then the 2022 low near $0.6270. The Australian dollar is near the lower Bollinger Band (~$0.6345) and has not settled above the midpoint (the 20-day moving average, now ~$0.6460) since November 7 when the Federal Reserve last met and cut the Fed funds target. 

Mexico:  Inflation, and especially the core rate, continues to trend lower. The economy appears to be losing momentum after a strong performance in Q3 (1.1% Q3 quarter-over-quarter after 0.2% in Q2 and anticipated to be around 0.4% in Q4). This encouraged investors to expect Mexico's central bank to deliver a quarter point cut on December 19. It would bring the overnight rate to 10%. The move would be the fifth rate cut in the easing cycle that began in March. The easing is expected to continue next year. The swaps market has the target rate between 8.50% and 8.75% at the end of next year. Chile's central bank meets on December 17. It its monetary policy rate 300 bp last year and another 300 bp this year, to 5.25%. The decline in November CPI to 4.2% from 4.7% encouraged speculation of a quarter point cut. The swaps market sees the rate bottoming between 4.50% and 4.75%. 

Excluding the Hong Kong dollar, five emerging market currencies gained on the dollar last week, and three were from Latam. They were joined by the South African rand and the Hungarian forint. The Colombian peso was the strongest rising 2.1% against the dollar. The  South African rand (~0.85%), and the Hungarian forint (~0.60%) pushed ahead of the the Brazilian real's 0.50% gain and the Mexican peso's 0.3% rise to round out the top five. Ahead of the weekend, Brazil's central bank intervened by selling almost $850 mln in the first spot auction in four months. Still, the greenback settled above BRL6.0550 (the session high was closer to BRL6.0760). Meanwhile, the US dollar is in its recent trough against the Mexican peso that extends to MXN20.10. Recall that on the eve of the US election last month, the dollar settled near MXN20.1050. On the other hand, the dollar has not traded below MXN20.00 since the day after the Fed cut last month. The post-US election was near MXN19.76. 

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