Written by Convera’s Market Insights team
BoJ to lead market volatility in December?
Boris Kovacevic – Global Macro Strategist
Policy makers in Europe confirmed their hesitancy to continue hiking policy rates following a string of disinflationary inflation and macro data earlier this week, causing bond yields to tumble and fixed income volatility to rise. Now, Japan has taken over the role as the global driver of price swings as markets prepare for the Bank of Japan to end its yield curve control as soon as December. The Japanese yen is on track for its best two-week streak against the euro since 2016, being up more than 4%.
Bank of Japan Governor Kazuo Ueda came out this week and said that his job is getting harder from the year-end, helping boost speculations that the central bank would lift its sub-zero policy rates soon. BoJ Deputy Himino fueled these bets after calling the December meeting live, pushing expectations of a policy tweak in two weeks to 55%. While Japan’s economy fell more than expected in the third quarter, dropping by an annualized 2.9%, inflation remains near multi-decade highs of 3.3%. The 5-year government bond yield suffered its sharpest one-day rise in a decade on Thursday, having pushed higher by more than 10 basis points to 0.375%.
USD/JPY has already fallen by 5% in four weeks from 151.00 to 144.20 and is now sensitive to the upcoming non-farm payrolls data. A rise in US unemployment could continue boosting bets on further Fed cuts and help push the pair lower. However, a meaningful downtrend can only be engineered by the BoJ changing its policy sooner than later.
Oil and yields to fall for 7th week
Boris Kovacevic – Global Macro Strategist
Global investors are gearing up for the highlight of the week, which comes in the form of the US non-farm payrolls report. The monthly data series is set to show the US unemployment rate rise from 3.9% to 4%, even against the backdrop of employment growth picking up due to the temporary rebound from the resolution of two major strikes during the previous month. The labor market data so far has disappointed expectations. Job openings decreased by 617 thousand to 8.73 million in October and the ADP employment report showed private hiring coming in weaker than anticipated (103k vs. 130k). The number of Americans filling for unemployment benefits remains low at 220 thousand. However, the number is still the second highest since September, showing that claims have started picking up again.
Today’s jobs report will be the first test of the markets assumption that the Federal Reserve would start cutting interest rates as early as next March with five cuts priced into 2024. The narrative that the next year would be a more accommodative one from a monetary policy perspective has led equity markets across the world higher with the S&P500 having risen for five consecutive weeks by a cumulative 12%. This risk sentiment and policy driven rally took a breather this week with stocks trading flat versus the Monday open. Brent oil is set to fall for a seventh week in a row, suggesting that weaker global growth is weighing on demand and is overshadowing the extension of the OPEC+ supply cuts into Q1. This movement is in line with inflation expectations falling and US yields on the long end (30-year) on track to fall for seven consecutive weeks as well, trading at 4.25%.
The US dollar has found its footing against the euro and pound but is only slightly up on the week on a trade weighted basis due to the strength of the Japanese yen. The US Dollar Index (DXY) is on track to rise for the first week in a month as EUR/USD fell from $1.10 to now $1.0770. GBP/USD has held up a bit better on expectations that the Bank of England would not be as aggressive in its policy easing cycle next year and has fallen from $1.2710 to now $1.2570.
USD weakness halts euro selloff
Ruta Prieskienyte – FX Strategist
The euro bounced back from a recent selloff as an uptick in US jobless claims confirmed that the US labour market is losing steam and prompted US dollar weakness. The common currency was broadly up on the day against most of its G10 peers but lost over 0.3% d/d against the Scandi duo of NOK and SEK. German 10-year government bond yield fell below 2.2% for the first time in 7 months as even more dovish ECB talk prompted traders to increase their expectations for early 2024 ECB rate cuts.
Eurozone GDP contraction was confirmed in Q3 in what was an otherwise non-eventful data release. A breakdown of the aggregate demand components showed that the bloc’s economic growth rate for the quarter was dragged down by a negative contribution from changes in inventory. On a more positive note, household consumption rose by 0.3% while public spending also advanced. Meanwhile, a number of signs are mounting to support a technical recession call to round out the end of the year. German industrial output unexpectedly shrunk by 0.4% m/m in October against market expectations of a 0.2% rise in what has become a fifth consecutive period of declining output, following a slip in industrial orders the day before. In fact, discounting the pandemic shock, industrial production remains at levels observed in 2010.
This week’s euro fate ultimately lies in the US NFP print later today, which is predicted to come in at 180k. If we see a stronger than expected report, the outcome would likely support the US dollar and push EUR/USD lower for a second consecutive week with short term support at $1.0750 level. On the contrary, a weak headline jobs figure and an uptick in the unemployment rate would elevate the probability of an earlier Fed rate cut. This would be disadvantageous to the US dollar and might help salvage EUR/USD performance this week given the pair is already down over 0.8% WTD.
Dovish ECB tilt hurts EUR, GBP/EUR gains
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 04 December
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
