Year-End Policy Rush: Markets Brace for Action
Forex Fundamentals Baseline report for WN50-2024
Tuesday, December 10, Week 50, 2024
Last week's stronger-than-expected US jobs report (227K vs 200K forecast) dominated market sentiment. Looking ahead, traders focus on crucial central bank meetings, with the ECB and SNB convening this week, followed by the Fed, BOJ, and BOE next week.
Currency Strength Rankings:
USD - VERY STRONG (unchanged): NFP beat at 227K, core CPI holds at 3.3%, restrictive Fed stance
CHF - STRONG (unchanged): October CPI at 0.6%, safe-haven flows intensify
JPY - MODERATELY STRONG (↑): BOJ policy shift signals emerge, trade deficit narrows to ¥461.25B
EUR - NEUTRAL (↓): Manufacturing PMI at 45.2, German coalition collapse
GBP - MODERATELY WEAK (unchanged): Manufacturing PMI at 48.6, inflation at 2.3%
CAD - WEAK (unchanged): November unemployment rises to 6.8%, dovish BOC stance
AUD - VERY WEAK (unchanged): Services PMI below 50, China exposure risks
NZD - VERY WEAK (unchanged): Manufacturing PMI at 45.8, RBNZ cuts to 4.25%
USD - VERY STRONG: Dollar's Data-Driven Dominance
November's NFP report surprised to the upside at 227K (vs 200K forecast), while core inflation remains sticky at 3.3% YoY through October 2024. The manufacturing sector shows resilience at 48.4, outperforming global peers. This economic outperformance maintains the Federal Reserve's restrictive policy stance, supporting the dollar's yield advantage.
The dominant theme remains robust US economic data driving policy divergence. The emerging theme focuses on the December 11, 2024 CPI print, which could challenge market expectations for aggressive Fed rate cuts in 2024.
Trading Economics forecasts suggest DXY reaching 106.43 by Q4 2024, with 10Y yields at 4.18% and S&P 500 at 6,047.91. While currency and yield targets appear achievable given current fundamentals, equity projections may prove optimistic.
Key Upcoming Events:
US CPI (Dec 11, 2024) - Core forecast 0.3% MoM
Retail Sales (Dec 17, 2024) - Consumer resilience check
Fed Rate Decision (Dec 18, 2024) - Policy statement and projections
PCE Price Index (Dec 20, 2024) - Fed's preferred inflation gauge
Trading Thesis: USD remains a compelling long against low-yielding currencies (EUR, JPY) and those with dovish central banks (NZD, CAD). Next week's Fed meeting could reinforce policy divergence trades.
CHF - STRONG: Safe-Haven Appeal Intensifies
Switzerland's fundamentals remain robust with October inflation at 0.6% and consistent trade surpluses providing strong support. The manufacturing PMI at 49.9, while in contraction, outperforms European peers, reinforcing the CHF's safe-haven status amid regional political uncertainty.
The dominant theme centers on safe-haven flows driven by German political uncertainty and global geopolitical tensions. An emerging theme focuses on potential SNB intervention as EURCHF approaches historical lows.
Trading Economics projects USD/CHF at 0.89 by Q4 2024, with the SMI reaching 11,737.79 points. Given current market dynamics and safe-haven flows, these targets appear conservative.
Key Upcoming Events:
SNB Rate Decision (Dec 14, 2024) - Policy stance and intervention signals
Trade Balance (Dec 19, 2024) - External position update
Trading Thesis: CHF presents an attractive long opportunity against EUR given regional risks, though position sizing requires careful consideration due to intervention risk.
JPY - MODERATELY STRONG: Policy Shift Potential Grows
The yen's upgrade reflects mounting expectations of BOJ policy normalization. October's trade deficit narrowed to ¥461.25 billion, while services PMI improved to 50.2. Manufacturing PMI, though contracting at 49.0, shows slower decline.
The dominant theme centers on BOJ policy normalization speculation, with Governor Ueda suggesting rate hikes are "nearing." The emerging theme focuses on intervention risk as USD/JPY approaches the 152 level.
Trading Economics projects USD/JPY at 150.90 by Q4 2024, with the Nikkei 225 at 38,943.07 points. These forecasts align with current market dynamics and evolving policy expectations.
Key Upcoming Events:
BoJ Nakamura Speech (Dec 13, 2024) - Policy signals
BOJ Rate Decision (Dec 19, 2024) - Critical policy guidance
Trading Thesis: JPY offers attractive long opportunities against risk-sensitive currencies (AUD, NZD) given potential policy normalization and safe-haven status.
EUR - NEUTRAL: Political Crisis Weighs
The euro's downgrade reflects deteriorating economic conditions and German political instability. November's composite PMI at 48.3 signals continued private sector contraction, while German industrial production's 0.4% MoM decline exceeded negative forecasts.
The dominant theme remains the impact of German coalition collapse on regional stability and economic policy. The emerging theme centers on ECB policy divergence from the Fed amid weakening economic data.
Trading Economics forecasts EUR/USD at 1.05 by Q4 2024, with the STOXX 50 at 4,914.45 points. These targets appear achievable given current headwinds.
Key Upcoming Events:
ECB Rate Decision (Dec 12, 2024) - Policy guidance
Flash PMIs (Dec 16, 2024) - Growth momentum check
Industrial Production (Dec 13, 2024) - Activity gauge
Trading Thesis: EUR warrants a neutral stance given offsetting factors, though short exposure versus CHF appears attractive given regional risks.
GBP - MODERATELY WEAK: Growth Concerns Persist
Sterling maintains weak fundamentals with manufacturing PMI at 48.6 and inflation at 2.3%. Recent GDP data showed contraction, while industrial production fell 0.5% MoM in October.
The dominant theme remains UK growth concerns and their impact on BOE policy. The emerging theme focuses on earlier rate cut expectations following weak economic data.
Trading Economics projects GBP/USD at 1.27 by Q4 2024, with the FTSE 100 at 8,297.19 points. These forecasts may prove optimistic given current headwinds.
Key Upcoming Events:
GDP Data (Dec 12, 2024) - Growth trajectory
Employment Data (Dec 17, 2024) - Labor market health
BOE Decision (Dec 19, 2024) - Policy stance
Trading Thesis: GBP presents short opportunities against USD given policy and growth headwinds.
CAD - WEAK: Labor Market Deteriorates
November's unemployment rate rise to 6.8% reinforces fundamental weakness. The Bank of Canada maintains a dovish stance amid ongoing growth concerns and falling inflation expectations.
The dominant theme centers on monetary policy divergence with the Fed. The emerging theme focuses on trade policy uncertainty following Trump's election victory.
Trading Economics forecasts USD/CAD at 1.41 by Q4 2024, with the S&P/TSX at 25,515.54 points. These targets align with current fundamentals.
Key Upcoming Events:
Manufacturing Sales (Dec 12, 2024) - Activity gauge
Wholesale Sales (Dec 13, 2024) - Trade momentum
CPI Data (Dec 19, 2024) - Inflation update
Trading Thesis: CAD remains a strong short candidate against USD given policy divergence and economic weakness.
AUD - VERY WEAK: China Exposure Weighs
Australia's fundamentals remain weak with November's manufacturing PMI at 49.4 and services PMI contracting to 49.6. Q3 GDP growth of 0.2% QoQ missed expectations, while China exposure amplifies downside risks.
The dominant theme remains China growth concerns impacting Australian exports. The emerging theme focuses on regional trade uncertainty following Trump's election.
Trading Economics projects AUD/USD at 0.64 by Q4 2024, with the ASX 200 at 8,422.22 points. These forecasts may prove optimistic given current headwinds.
Key Upcoming Events:
Consumer Confidence (Dec 12, 2024) - Sentiment check
Employment Data (Dec 14, 2024) - Labor market health
RBA Minutes (Dec 19, 2024) - Policy insights
Trading Thesis: AUD presents strong short opportunities against both USD and JPY given weak fundamentals and external risks.
NZD - VERY WEAK: Policy Divergence Widens
The New Zealand dollar maintains its bottom ranking with manufacturing PMI at 45.8 marking 20 consecutive months of contraction. The RBNZ's recent 50bps rate cut to 4.25% and signals of further easing underscore the currency's weakness.
The dominant theme centers on RBNZ's dovish stance and policy divergence with other major central banks. The emerging theme focuses on deteriorating economic data and its implications for monetary policy.
Trading Economics forecasts NZD/USD at 0.58 by Q4 2024, with the NZX 50 at 12,831.18 points. These targets appear achievable given current fundamentals.
Key Upcoming Events:
GDP Data (Dec 13, 2024) - Growth assessment
Business PMI (Dec 14, 2024) - Activity gauge
Trade Balance (Dec 19, 2024) - External position
Trading Thesis: NZD remains the most attractive short candidate among majors given weak fundamentals and dovish central bank stance.
Conclusion
The currency landscape remains defined by policy divergence as 2024 draws to a close. USD maintains its dominance through data strength, while JPY's potential policy shift and European political challenges reshape the fundamental picture.
Critical Events (Dec 10-20, 2024):
US CPI Data (Dec 11) - Core inflation trajectory
ECB Meeting (Dec 12) - European policy stance
SNB Decision (Dec 14) - Swiss policy stance
Fed Rate Decision (Dec 18) - Policy guidance and projections
BOE/BOJ Decisions (Dec 19) - Critical policy signals
Sources: BOE, ECB, Fed, BOJ, BOC, RBNZ, RBA, SNB, Bloomberg, Reuters, Trading Economics.