Political Risk Premium Returns as French Crisis Rattles Euro
The euro's dramatic downgrade to moderately weak, triggered by French political instability, highlights mounting challenges for risk-sensitive currencies. Looking ahead to Thursday's PCE data and central bank decisions during the upcoming few weeks, traders face a complex landscape of diverging policy paths and heightened political risk premiums.
USD - VERY STRONG (Unchanged): Hawks Take Flight
U.S. economic resilience underpins the dollar's exceptional strength. Services PMI hit 57.0 in November, a 32-month high, while manufacturing improved to 48.8. Morgan Stanley and Goldman Sachs now see higher terminal rates, with JPMorgan warning of delayed Fed cuts until Q3 2025.
DXY forecasts clustering around 105.46 by Q4 2024 appear increasingly conservative. Technical resistance at 106.50 faces immediate tests. Tuesday's PCE data could cement hawkish Fed expectations if core inflation remains above 2.7% YoY. COT positioning shows leveraged funds 65% net long USD, suggesting extended but not extreme bullishness.
CHF - STRONG (Unchanged): Haven Flows Intensify
Record-low inflation at 0.6% reinforces Switzerland's fundamental appeal amid European political tensions. Manufacturing PMI held steady at 48.5, though overshadowed by safe-haven demand. Credit Suisse expects SNB intervention risks to rise near USD/CHF 0.87.
Market forecasts for USD/CHF at 0.88 by Q4 2024 appropriately balance intervention risks against haven demand. SMI projections of 11,895.84 reflect steady domestic conditions. Watch SNB's Thursday liquidity data for intervention clues. COT data shows dealers net long while asset managers maintain substantial shorts, creating potential volatility catalysts.
EUR - MODERATELY WEAK (↓ from MODERATELY STRONG): Political Premium Soars
French budget battles sparked the euro's dramatic downgrade. Manufacturing PMI deteriorated to 45.2 while ECB's Kazaks hints at larger December cut. "The political situation in France creates additional uncertainty for the euro," notes BNP Paribas strategist Jean Medecin.
EUR/USD targets of 1.07 by Q4 2024 need revision given mounting risks. STOXX 50 futures point to further pressure at 4,843.70. Wednesday's German CPI data crucial for ECB policy path. Asset managers hold record EUR longs per COT data, suggesting painful unwinding potential.
GBP - MODERATELY WEAK (Unchanged): Mixed Signals Persist
Sterling's fundamental weakness continues despite housing market resilience. Manufacturing PMI's decline to 48.0 confirms industrial sector struggles. Core inflation holding at 2.3% provides some policy stability. Barclays sees BOE cuts delayed until Q2 2025.
Current GBP/USD projections of 1.28 by Q4 2024 appear ambitious. FTSE 100 targets of 8,183.37 reflect Brexit-driven export benefits. Tuesday's final services PMI could shift BOE expectations. COT data shows leveraged funds maintaining cautious GBP longs despite uncertainties.
JPY - WEAK (↓ from NEUTRAL): Policy Uncertainty Weighs
Yen's downgrade reflects growing monetary policy divergence. Manufacturing PMI at 49.0 shows continued contraction while services barely expanded at 50.2. "BOJ normalization timeline remains highly uncertain," states Morgan Stanley's Japan strategist Takeshi Yamaguchi.
USD/JPY forecasts of 155.48 by Q4 2024 suggest continued pressure absent intervention. Nikkei 225 projections of 38,923.13 reflect export sector benefits. Wednesday's Tokyo CPI crucial for policy outlook. COT positioning shows extreme JPY shorts, creating sharp reversal risks near intervention zones.
CAD - WEAK (Unchanged): Trade Risks Mount
Canadian fundamentals face dual headwinds from Trump's 25% tariff threat and dovish BOC stance. Manufacturing PMI's surprise jump to 52.0 provides limited support. TD Securities expects 25bp cut on December 6th given persistent growth concerns.
USD/CAD targets of 1.40 align with deteriorating outlook. TSX projections of 24,131.83 suggest some economic resilience. Friday's employment data could cement BOC easing. COT data shows dealers aggressively long CAD despite mounting risks.
AUD - VERY WEAK (Unchanged): China Exposure Bites
Australian dollar vulnerability intensifies as Trump threatens new China tariffs. Manufacturing PMI contracts at 49.4 while services activity drops below 50. RBA Governor Bullock maintains hawkish stance despite mounting headwinds.
AUD/USD forecasts of 0.65 by Q4 2024 may prove optimistic. ASX 200 targets of 8,165.90 reflect domestic stability over external risks. Tuesday's RBA decision critical for near-term direction. Leveraged funds hold record AUD shorts per COT data, suggesting potential short squeeze catalysts.
NZD - VERY WEAK (Unchanged): Dovish RBNZ Cements Status
New Zealand's fundamental position deteriorates further post-50bp rate cut. Manufacturing PMI at 45.8 marks 20-month contraction streak. ANZ Bank sees OCR at 3.75% by mid-2025 as growth concerns persist.
NZD/USD projections of 0.59 by Q4 2024 reflect continued pressure. NZX 50 forecasts of 12,516.35 suggest economic resilience despite policy headwinds. Tuesday's terms of trade data important for sentiment. COT positioning shows extreme bearish consensus, creating contrarian opportunities.
Critical Events Next Three Days:
Tuesday, Dec 3: US Factory Orders (10:00 EST) - Manufacturing health check
Wednesday, Dec 4: US Core PCE (08:30 EST) - Fed policy implications
Wednesday, Dec 4: German CPI (08:00 EST) - ECB cut pressure
Thursday, Dec 5: US Initial Claims (08:30 EST) - Labor market pulse
Sources: Bloomberg, Reuters, Financial Times, Wall Street Journal, Central Banks (Federal Reserve, ECB, BOE, BOJ, SNB, RBA, RBNZ), Investment Banks (Morgan Stanley, Goldman Sachs, JPMorgan, Credit Suisse, BNP Paribas, TD Securities, ANZ Bank), Trading Economics, COT Reports.