The DXY Index may regain its composure after last week’s profit-taking into Thanksgiving. The US Treasury 10Y yield fell 23 bps to 4.17% last week after US President-elect Donald Trump nominated Steve Bessent as Treasury Secretary. Investors believed Bessent would responsibly carry out Trump’s tax and tariff plans without reigniting inflation. They were also complacent regarding Trump’s transactional approach to tariffs as a negotiating tactic to compel other countries to comply with US demands. We noted that during Trump’s first term, the US and China engaged in a tit-for-tat tariff war in 2018-2019 before signing a Phase One deal in January 2020.
This week’s focus returns to US data and Powell before the Fed’s blackout period next week. During his discussion on December 4, Fed Chair Jerome Powell may temper rate cut expectations. Some Fed officials reckoned that tariffs would cause a one-time price increase provided they do not lead to retaliatory tariff wars. They also reckoned that the mass deportations of undocumented immigrants could disrupt the labour market. This Friday, US nonfarm payrolls should increase to 200K in November from the disruptions (hurricanes and labour strikes) that pummelled October’s reading to 12K.
EUR/USD may resume retreating below 1.06 after last week’s rebound from sub-1.04 levels. The OIS market is betting that the European Central Bank will lower the deposit facility rate by an outsized 50 bps to 3% at its meeting on December 12. However, ECB President Christine Lagarde will likely favour gradual rate cuts when she appears before the European Parliament’s Committee on Economic and Monetary Affairs on December 4. On Trump’s tariff threats, she views them as slightly positive for inflation in the short term and negative for growth in the longer term. Lagarde will likely urge EU lawmakers against retaliation to the US to avoid a trade war. Instead, she will encourage more negotiation and encourage EU countries to buy more US products.
USD/CHF found support around 0.88 after its first weekly decline in seven weeks from 0.8940. Over the past fortnight, the Swiss National Bank has been particularly dovish whenever EUR/CHF fell close to its critical support level of 0.93. Over the weekend, SNB President Martin Schlegel warned that Germany’s weak demand was hurting Swiss industries. Earlier on November 22, Schlegel emphasized that the central bank had not excluded returning to negative interest rates to dampen the CHF’s haven role. Not surprisingly, the OIS market is betting that SNB will lower its target rate by an outsized 50 bps to 0.50% on December 12. This conviction will increase if tomorrow’s Swiss CPI inflation reports a third monthly decline in November and Thursday’s unemployment rate rises to 2.7% in November, its highest level since September 2021.
USD/JPY fell significantly by 3.2% to 149.77 last week on bets that the Bank of Japan to hike rates at the December 18-19 meeting may be short-lived. Following Prime Minister Shigeru Ishiba’s call for Japanese companies to deliver large wage growth next year, BOJ Governor Kazuo Ueda said economic data were on track and supportive of rate hikes. However, falling US bond yields also played a significant role, which may run out of steam this week.
Quote of the Day
“You cannot control what happens to you, but you can control your attitude toward what happens to you, and in that, you will be mastering change rather than allowing it to master you.”
Brian Tracy
December 2 in history
Enron became the largest company in US history to declare bankruptcy in 2001.
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