French Political Crisis and US-China Trade Tensions Roil Currency Markets
Wednesday, December 04, Week 49, 2024
The currency market landscape is being transformed by the deepening political crisis in France and its ripple effects across European assets. Barnier's government faces an imminent no-confidence vote over the 2025 budget impasse, creating significant uncertainty. Meanwhile, Trump's renewed tariff threats against BRICS nations and tech export restrictions to China have amplified global trade tensions. Looking ahead to this week's critical events, traders are closely monitoring Thursday's PCE data and central bank decisions, with the RBA and BOC meetings potentially signaling significant policy shifts.
USD - VERY STRONG (Unchanged): Dollar Dominance Expands
The dollar's exceptional strength gains fresh momentum amid robust economic data and trade policy developments. Monday's ISM Manufacturing PMI surprised at 48.4 (vs. 47.5 expected), while Tuesday's JOLTS job openings surged to 7.744M (vs. 7.48M forecast). Goldman Sachs and Morgan Stanley have revised their Fed rate cut timelines, with JPMorgan now suggesting cuts may be delayed until Q3 2025.
Trading Economics forecasts project the DXY at 106.11 by Q4 2024 and 107.10 in 12 months, though mounting evidence suggests upside risk. The S&P 500's projected climb to 5,990.76 reflects broader economic confidence, while US 10-year yields targeting 4.15% suggest continued monetary policy support. Tuesday's factory orders and Wednesday's services PMI will be crucial for confirming momentum.
CHF - STRONG (Unchanged): Safe-Haven Appeal Intensifies
Switzerland's stability premium strengthens amid European political turmoil. Tuesday's steady inflation print at 0.7% YoY matched expectations, while the KOF Economic Barometer surprised at 101.8. Recent SNB commentary suggests growing intervention risk near USDCHF 0.89, though European uncertainty may limit franc weakness.
Market forecasts show CH20 reaching 11,688.91 by quarter-end, with Swiss 10Y yields stable at 0.20%. The SMI's resilience despite external pressures highlights Switzerland's safe-haven status. Thursday's CPI data could influence SNB policy expectations.
EUR - WEAK (↓ from MODERATELY WEAK): Political Crisis Deepens
The euro faces mounting headwinds as France's political crisis intensifies. Manufacturing PMI contracted further to 45.2, while unemployment held steady at 6.3%. ECB's Kazaks hints at a potential 50bp December cut, accelerating bearish sentiment. Marine Le Pen's opposition to the budget adds another layer of uncertainty.
Trading Economics projects EURUSD at 1.05 by year-end and 1.04 in 12 months. The EU50's forecast decline to 4,768.60 suggests growing economic pressure. German 10Y Bund yields targeting 2.07% reflect rising easing expectations. Watch ECB President Lagarde's Thursday speech for rate guidance.
GBP - MODERATELY WEAK (Unchanged): Mixed Data Muddles Outlook
Sterling's fundamental position remains challenged despite some positive housing data. The BRC retail sales monitor showed a sharp 3.4% YoY decline, while manufacturing PMI contracted to 48.0. However, house price growth accelerated unexpectedly to 3.7% YoY, providing some support.
Current GBPUSD projections of 1.27 by Q4 look increasingly stretched given economic headwinds. The GB100's forecast of 8,244.20 suggests some Brexit-driven export benefits persist. Thursday's construction PMI could shift BOE rate expectations.
JPY - WEAK (Unchanged): Policy Uncertainty Prevails
Yen weakness continues amid uncertain BOJ policy trajectory. Manufacturing PMI hit an eight-month low at 48.4, though services improved to 50.2. Governor Ueda's signals about potential rate hikes have complicated market expectations, with traders now pricing a 60% chance of December action.
USDJPY forecasts of 155.48 by Q4 2024 suggest continued pressure without intervention. The JP225's projected decline to 38,923.13 reflects growing economic concerns. Friday's household spending data will be crucial for policy outlook.
CAD - WEAK (Unchanged): Trade Tensions Loom
Canadian fundamentals face increased pressure from Trump's tariff threats, despite manufacturing PMI's surprise jump to 52.0. The TSX's rally to record highs, driven by commodity producers, provides limited currency support given BOC easing expectations.
Trading Economics sees USDCAD at 1.40 by quarter-end and 1.42 in 12 months. TSX projections of 24,131.83 suggest some economic resilience. Thursday's trade balance data could influence BOC's December 6th decision.
AUD - VERY WEAK (Unchanged): China Risks Mount
Australian dollar vulnerability grows as US-China tensions escalate. Manufacturing PMI contracted to 49.4, while services activity dropped below 50. RBA Governor Bullock maintains a hawkish stance despite mounting external headwinds.
AUDUSD targets of 0.65 by Q4 2024 may need downward revision given trade tensions. ASX 200 projections of 8,165.90 reflect steady domestic conditions. Today's RBA decision and Thursday's trade balance data crucial for near-term direction.
NZD - VERY WEAK (Unchanged): Growth Concerns Persist
New Zealand's weak fundamentals justify bottom ranking following the RBNZ's recent 50bp cut. The surprise 2.4% increase in terms of trade provides limited support given broader growth concerns. Manufacturing PMI remains in contraction at 45.8, marking a 20-month weakness streak.
NZDUSD forecasts of 0.59 by Q4 2024 reflect continued pressure. The NZX50's projected decline to 12,516.35 suggests growing economic headwinds. Thursday's manufacturing sales data important for sentiment.
CONCLUSION
Key Events Next Three Days:
Tuesday, Dec 03
RBA Rate Decision (22:30 EST) - Policy trajectory crucial
US Factory Orders (10:00 EST) - Manufacturing health check
Wednesday, Dec 04
US Services PMI (10:00 EST) - Economic momentum assessment
Canadian Trade Balance (08:30 EST) - BOC decision implications
Thursday, Dec 05
ECB Lagarde Speech (09:00 EST) - Rate cut guidance
US Initial Claims (08:30 EST) - Labor market pulse
Sources: Bloomberg, Reuters, Financial Times, Wall Street Journal, CNBC, Trading Economics, Central Banks (Fed, ECB, BOE, BOJ, SNB, RBA, RBNZ), Investment Banks (Goldman Sachs, JPMorgan, Morgan Stanley).