Year-End 2024: Growth Divergence Drives FX

What to buy, what to sell...

Monday, December 23, 2024 (Week 52)

The fundamental landscape continues evolving as we approach year-end, with the yen's upgrade to "Strong" marking the most significant shift since our December 18th report. The previous week centered on central bank decisions - notably the Fed's projection of just two rate cuts for 2025 contrasting with the SNB's surprise 50bps reduction. Holiday-thinned liquidity and year-end positioning will likely dominate price action through December 27th.

Currency Strength Rankings:

• USD - VERY STRONG (unchanged): November retail sales +0.7%, Q3 GDP revised to 3.1%, 227K jobs added

• CHF - STRONG (unchanged): SNB's 50bps cut offset by safe-haven demand amid European uncertainty

• JPY - STRONG (↑ from Moderately Strong): November CPI at 2.9%, policy normalization speculation intensifies

• EUR - MODERATELY WEAK (unchanged): December manufacturing PMI stagnant at 45.2

• GBP - MODERATELY WEAK (unchanged): October GDP -0.1%, November CPI +2.6%

• CAD - WEAK (unchanged): November unemployment 6.8%, CPI eases to 1.9%

• AUD - VERY WEAK (unchanged): Q3 GDP +0.3%, business confidence falls to -3

• NZD - VERY WEAK (unchanged): Q3 GDP -1.0%, manufacturing PMI 45.5

USD: VERY STRONG - Economic Resilience Underpins Dollar Dominance

The United States, boasting a $27.721 trillion economy according to 2024 data, is preparing for Trump's return to the presidency. The Federal Reserve, under Jerome Powell's leadership, maintains a 4.50-4.75% target range following its December 18th rate decision. Geopolitical focus centres on Trump's proposed tariffs against China and the EU. Key scheduled events include this week's initial jobless claims (December 26) and goods trade balance (December 27).

The dollar's very strong rating rests on concrete economic outperformance. Q3 GDP surprised at 3.1% versus 2.8% consensus, while November's retail sales jumped 0.7% against 0.5% forecasts. Labour markets remain robust, with the December 6th jobs report showing 227,000 positions added. Trading Economics data, dated December 20th, shows core PCE at 3.3% year-over-year, suggesting controlled but persistent inflation.

The dominant theme, evidenced in the December 18th Fed meeting, centers on divergent policy paths. While the Fed projects just two 2025 rate cuts, peers like the SNB and ECB signal more aggressive easing. An emerging theme focuses on trade policy uncertainty, with markets particularly focused on Trump's proposed EU and China tariffs.

Trading Economics forecasts from December 20th project:

• DXY Index: 107.19 by Q4 2024

• 10-year yield: 4.32% by Q4 2024

• S&P 500: 6,047.91 by Q4 2024 These targets appear achievable given current yield spreads and growth differentials.

Key Upcoming Events:

• Initial Jobless Claims (Dec 26) - First post-Fed labour market check

• Goods Trade Balance (Dec 27) - Dollar strength impact assessment

• Wholesale Inventories (Dec 27) - Business stockpiling trends

• Home Sales Data (Dec 27) - Housing sector resilience check

CHF: STRONG - Safe-Haven Premium Intact Despite Rate Cut

The SNB, led by Thomas Jordan, cut rates by 50bps to 0.50% on December 12th, citing easing inflation pressures. Political neutrality continues attracting safe-haven flows amid European uncertainty. The KOF Leading Indicators (December 27) and upcoming CPI data represent key event risks.

The franc maintains its strong rating despite the recent rate cut. November inflation reached 0.7% year-over-year, well within the SNB's target. The November trade surplus registered CHF4B according to December 19th data. COT figures from December 17th show leveraged funds increased net short positions to 16,120 contracts, suggesting potential short-covering support.

The dominant theme revolves around safe-haven demand, particularly following French political changes announced December 13th. The emerging theme centres on intervention risk as EUR/CHF tests historic lows, though December 12th's rate cut may reduce SNB activity.

Trading Economics projects:

• USD/CHF: 0.90 by Q4 2024

• SMI: 11,737.79 by Q4 2024 These forecasts appear conservative given persistent European uncertainties.

Key Upcoming Events:

• KOF Leading Indicators (Dec 27) - Growth momentum check

• UBS Consumption Indicator (Dec 27) - Consumer health gauge

• Trade Balance Detail (Dec 27) - Export sector resilience

• Money Supply Data (Dec 27) - Monetary conditions assessment

JPY: STRONG - BOJ Policy Shift Expectations Drive Momentum

Japan, with its $4.2 trillion economy, operates under Prime Minister Shigeru Ishiba's leadership. The BOJ, led by Governor Kazuo Ueda, maintained its 0.25% rate on December 19th while adopting hawkish forward guidance. Regional tensions with North Korea and China create ongoing uncertainty. The industrial production report (December 27) and December Tokyo CPI data represent imminent event risks.

The yen's upgrade to strong reflects mounting evidence of policy normalization. November CPI surprised at 2.9% year-over-year according to December 20th data, while machinery orders rose 2.1% month-over-month versus 1.2% consensus. December 17th COT data shows Asset Managers holding 4,031 net long contracts, indicating growing institutional confidence.

The dominant theme, reinforced at the December 19th BOJ meeting, centres on policy normalization speculation. The emerging theme focuses on regional trade tensions following Trump's election victory and proposed China tariffs.

Trading Economics forecasts from December 20th indicate:

• USD/JPY: 153.97 by Q4 2024

• Nikkei 225: 38,943.07 by Q4 2024 These targets may prove conservative given policy shift momentum.

Key Upcoming Events:

• Industrial Production (Dec 27) - Manufacturing sector health

• Retail Trade (Dec 27) - Consumer demand assessment

• Department Store Sales (Dec 27) - Consumption trends

• Construction Orders (Dec 27) - Building sector momentum

EUR: MODERATELY WEAK - Political Uncertainty Compounds Growth Challenges

The Eurozone, representing a $19.4 trillion economy, faces significant headwinds under ECB President Christine Lagarde's leadership. The ECB cut rates by 25bps to 3.15% on December 12th, signalling further easing ahead. French political instability and German coalition uncertainty create notable risks. The M3 money supply report (December 27) provides the next key data point.

The euro's moderately weak status reflects deteriorating fundamentals. The December flash manufacturing PMI remained in contraction at 45.2, while German industrial production fell 1.0% month-over-month in October. December 17th COT data shows leveraged funds maintaining significant net short positions.

The dominant theme, highlighted by December 12th's ECB decision, centres on dovish policy divergence from the Fed. The emerging theme focuses on political fragmentation risks following French leadership changes announced December 13th.

Trading Economics projections as of December 20th:

• EUR/USD: 1.05 by Q4 2024

• STOXX 50: 4,914.45 by Q4 2024 These targets align with current headwinds.

Key Upcoming Events:

• M3 Money Supply (Dec 27) - Monetary conditions check

• Private Loans (Dec 27) - Credit growth assessment

• Economic Confidence (Dec 27) - Sentiment indicators

• German Import Prices (Dec 27) - Inflation pressures

GBP: MODERATELY WEAK - Growth Concerns Outweigh Inflation Persistence

The United Kingdom's $3.588 trillion economy operates under Prime Minister Keir Starmer's leadership. The BOE maintained its 4.75% rate on December 19th amid mixed signals. Trade policy uncertainty following Trump's election creates headwinds. The Nationwide Housing Prices report (December 27) represents the next significant data point.

Sterling's moderately weak position reflects persistent challenges. October GDP contracted 0.1% month-over-month per December 13th data, though November inflation rose to 2.6% year-over-year. December 17th COT data shows leveraged funds holding 74,685 net short contracts.

The dominant theme, reinforced by December 19th's BOE decision, centres on growth concerns versus inflation persistence. The emerging theme focuses on rate cut timing, with markets increasingly pricing early 2025 easing.

Trading Economics indicates:

• GBP/USD: 1.26 by Q4 2024

• FTSE 100: 8,297.19 by Q4 2024 These forecasts may prove optimistic given growth headwinds.

Key Upcoming Events:

• Nationwide House Prices (Dec 27) - Property market health

• Money Supply (Dec 27) - Monetary conditions

• Mortgage Approvals (Dec 27) - Housing sector activity

• Consumer Credit (Dec 27) - Household borrowing trends

CAD: WEAK - Labour Market Deterioration Drives Rate Cut Bets

Canada's $2.117 trillion economy operates under Prime Minister Justin Trudeau's leadership. The BOC cut rates by 50bps to 3.25% on December 11th amid growth concerns. Trump's proposed 25% tariffs create significant uncertainty. The monthly GDP report (December 27) provides the next crucial data point.

The Canadian dollar's weak status reflects fundamental deterioration. November's unemployment rate jumped to 6.8% from 6.5% according to December 6th data, while inflation eased to 1.9% year-over-year per December 17th figures. December 17th COT data shows dealers maintaining substantial net short positions.

The dominant theme, emphasized at the December 11th BOC meeting, centres on dovish policy divergence from the Fed. The emerging theme focuses on trade policy risks following Trump's election victory.

Trading Economics forecasts from December 20th:

• USD/CAD: 1.42 by Q4 2024

• TSX: 25,515.54 by Q4 2024 These targets align with current fundamentals.

Key Upcoming Events:

• Monthly GDP (Dec 27) - Growth trajectory check

• Building Permits (Dec 27) - Construction activity

• Industrial Prices (Dec 27) - Pipeline inflation

• Raw Materials Prices (Dec 27) - Input cost trends

AUD: VERY WEAK - China Exposure Amplifies Vulnerability

Australia's $1.802 trillion economy operates under Prime Minister Anthony Albanese's leadership. The RBA maintains a 4.35% cash rate amid inflation concerns. China's slowdown and US-China trade tensions create significant headwinds. Private sector credit data (December 27) represents the next key release.

The aussie's very weak rating reflects multiple challenges. Q3 GDP disappointed at 0.3% quarter-over-quarter per December 4th data, while business confidence plunged to -3 in November from +5 according to December 10th figures. December 17th COT data shows Asset Managers increasing net short positions.

The dominant theme centres on China exposure risks, particularly following December announcements of potential US tariffs. The emerging theme focuses on RBA easing expectations amid deteriorating data.

Trading Economics projects:

• AUD/USD: 0.64 by Q4 2024

• ASX 200: 8,422.22 by Q4 2024 These forecasts appear optimistic given external risks.

Key Upcoming Events:

• Private Sector Credit (Dec 27) - Lending trends

• Housing Credit (Dec 27) - Property sector health

• Business Credit (Dec 27) - Investment activity

• Money Supply (Dec 27) - Monetary conditions

NZD: VERY WEAK - Recession Confirms Dovish Policy Path

New Zealand's $270 billion economy operates under Prime Minister Christopher Luxon's leadership. The RBNZ maintains a 4.25% rate following recent cuts. China's slowdown and trade uncertainty create significant headwinds. Trade balance data (December 27) provides the next key insight.

The kiwi's very weak position reflects confirmed recession. Q3 GDP contracted 1.0% quarter-over-quarter according to December 18th data, while manufacturing PMI fell to 45.5 in November. December 17th COT data shows Non-Commercial traders reducing long positions.

The dominant theme, reinforced by December 18th's GDP report, centres on recession confirmation. The emerging theme focuses on RBNZ easing expectations, with markets pricing significant 2025 cuts.

Trading Economics indicates:

• NZD/USD: 0.57 by Q4 2024

• NZX 50: 12,831.18 by Q4 2024 These targets align with current headwinds.

Key Upcoming Events:

• Trade Balance (Dec 27) - External position check

• Export/Import Values (Dec 27) - Trade activity

• Building Consents (Dec 27) - Construction sector

• Money Supply (Dec 27) - Monetary conditions

Conclusion

The currency landscape approaching 2025 shows increasing fundamental divergence. U.S. economic resilience contrasts sharply with weakness in commodity currencies, while the yen's potential policy shift reshapes regional dynamics. Political risks and recession fears create additional pressure points across several major pairs.

Key Events (December 23-27, 2024):

1. U.S. Initial Jobless Claims (Dec 26) - Labour market health

2. Multi-country Industrial Production Reports (Dec 27)

3. Japanese Retail Sales (Dec 27)

4. UK Nationwide Housing Prices (Dec 27)

5. Canadian Monthly GDP (Dec 27)

Sources: Federal Reserve, European Central Bank, Bank of Japan, Bank of England, Swiss National Bank, Reserve Bank of Australia, Reserve Bank of New Zealand, Bank of Canada, Bloomberg, Reuters, Trading Economics.