Currency Markets Realign as Monetary Policy Splits
Monday, December 09, Week 50, 2024
Global currency markets stand at a critical juncture as major central banks chart divergent policy paths heading into 2025. French political turmoil intensifies after Prime Minister Barnier loses a no-confidence vote, sending ripples through European markets.
USD - VERY STRONG (Unchanged): Dollar Dominance Extends
The greenback's fundamental strength gained fresh momentum after November's NFP surprised at 227K versus 200K forecast, while unemployment held steady at 4.2%. Core PCE inflation remains sticky at 2.8% YoY through October, reducing expectations for early Fed rate cuts. According to Trading Economics data, DXY forecasts point to 106.43 by Q4 end, climbing to 107.29 in 2025.
Latest COT positioning from November 19 shows asset managers heavily net long USD, while leveraged funds maintain significant short exposure, setting up potential volatility around Wednesday's FOMC meeting.
Trump's electoral victory and planned tariffs on China, Mexico and Canada create an inflationary backdrop supporting USD strength into 2025.
CHF - STRONG (Unchanged): Safe Haven Appeal Intensifies
Switzerland's exceptional stability draws increased flows amid mounting global uncertainty. Core inflation fell to a record low 0.6% in October while the KOF Economic Barometer surprised at 101.8 in November. SNB foreign exchange reserves hit CHF 724.555 billion in November per official data, suggesting growing intervention capacity.
Trading Economics forecasts point to USD/CHF at 0.89 by Q4 and 0.90 in 12 months, while the CH20 index targets 11,737 points.
November 19 COT data reveals dealers net long while leveraged funds maintain substantial shorts, creating potential for sharp moves around Thursday's SNB meeting.
JPY - MODERATELY STRONG (Unchanged): BOJ Policy Shift Looms
Core inflation steady at 2.3% through October and rising wage pressures sustain expectations for BOJ normalization. The au Jibun Bank PMI data showed manufacturing falling to 49.0 in November while services improved to 50.2, painting a mixed economic picture.
Trading Economics projects USD/JPY reaching 150.90 by Q4 end and climbing to 153.18 in 2025. The Nikkei 225 forecast suggests 38,923 points by quarter-end.
Latest COT positioning reveals heavy speculative JPY shorts, setting up potential sharp covering rallies if the BOJ signals policy shifts at Thursday's meeting.
EUR - NEUTRAL (Unchanged): Political Crisis Weighs
The euro faces mounting headwinds as France's government faces challenges. The S&P Global PMI data showed manufacturing contracting further to 45.2 while services dropped to 49.5 in November. Core inflation held at 2.7% against expectations of 2.8%.
Trading Economics sees EUR/USD at 1.05 by year-end, declining to 1.04 in 2025. The STOXX 50 is forecast to reach 4,914 points.
November 19 COT data indicates mixed positioning ahead of the ECB's crucial Thursday meeting, though deteriorating fundamentals suggest downside risks prevail.
GBP - MODERATELY WEAK (Unchanged): Rate Cut Impact Lingers
Sterling's fundamental weakness persists following the BOE's surprise 25bp cut to 4.75%. Manufacturing PMI contracted to 48.6 while CPI surged to 2.3% YoY in October per ONS data. The Labour Party's planned £40 billion tax increase adds fiscal headwinds.
Trading Economics projects GBP/USD at 1.27 by Q4 and 1.26 in 2025, with the FTSE 100 targeting 8,297 points.
Latest COT positioning shows leveraged funds maintaining long exposure despite growing rate cut expectations for 2025.
CAD - WEAK (↓ from MODERATELY WEAK): Labor Market Deteriorates
The Canadian dollar's downgrade reflects surging unemployment to 6.8% in November from 6.5% prior. While manufacturing PMI improved to 52.0, broader economic concerns persist including Q3 GDP growth of just 1% annualized versus 1.5% forecast.
Trading Economics forecasts USD/CAD reaching 1.41 by Q4 end and 1.42 in 2025. The S&P/TSX target suggests 25,515 points.
November 19 COT data shows leveraged funds heavily short CAD while asset managers maintain substantial long positions.
AUD - VERY WEAK (Unchanged): China Exposure Weighs
Australian fundamentals deteriorate as manufacturing PMI contracts at 49.4 and services activity drops below 50 to 49.6 in November per S&P Global data. The RBA's restrictive stance contrasts with global peers while China trade tensions escalate.
Trading Economics sees AUD/USD at 0.64 by year-end, with the ASX 200 targeting 8,422 points by Q4 end.
Latest COT positioning reveals heavy speculative shorts, though oversold conditions could spark covering rallies on positive surprises.
NZD - VERY WEAK (Unchanged): RBNZ Dovishness Persists
The kiwi's fundamental weakness deepens after the RBNZ's 50 bp cut to 4.25% in November. BusinessNZ PMI data shows manufacturing contracting at 45.8, marking 20 straight months of decline. Business confidence slid further per the ANZ survey.
Trading Economics forecasts NZD/USD at 0.58 through year-end, while the NZX 50 targets 12,831 points.
November COT data indicates overwhelming bearish sentiment with traders focused on further RBNZ easing potential into early 2025.
CONCLUSION
Key Events to watch:
US CPI (Dec 11, 08:30 EST) - Core inflation rate expected at 3.30%
BoC Rate Decision (Dec 11) - Guidance after recent unemployment spike
Fed Rate Decision (Dec 18, 14:00 EST) - Focus on 2025 rate path projections
ECB Rate Decision (Dec 12, 07:45 EST) - Markets expect 25bp cut to 3.15%
BoE Rate Decision (Dec 19, 07:00 EST) - Growth versus inflation balance
BoJ Meeting (Dec 19, 23:00 EST) - Potential policy normalization signals
Sources: Federal Reserve Economic Data, European Central Bank Statistics, Bank of England Database, Bank of Japan Statistics, Swiss National Bank Data, Reserve Bank of Australia Statistics, Reserve Bank of New Zealand Data, Reuters News Service, Bloomberg Terminal Data, Trading Economics Database, S&P Global Market Intelligence.