Profit-taking sent the USD and US bond yields lower before the long Thanksgiving holiday starting today.US stock and bond markets will be closed on Thursday and Friday before returning on Monday.
The DXY Index fell a second time in three days by 0.9% to 106, its lowest close since November 11. US inflation data met expectations; October’s PCE headline and core inflation were unchanged at 0.2% MoM and 0.3%, respectively, the same level as a month ago. The futures market increased the probability (66.5% vs. 52.3% a week ago) of the Fed lowering rates by 25 bps to 4.00-4.25% at its FOMC meeting on December 18.The US Treasury 2Y yield fell a third session by 2.9 bps to 4.23%, its lowest close since November 7. The 10Y yield ended November at 4.26%, near the month’s low of 4.22% seen on November 1. US fiscal sustainability worries ebbed after Trump nominated prominent hedge fund manager Steve Bessent as US Treasury Secretary.
With US bond yields near this month’s lows, most currencies in the DXY basket appreciated in the first three days of the week. The JPY outperformed with a 2.4% rally to 151 per USD, recovering all its losses after the November 5 US elections. JPY sellers retreated on fears of a hawkish tilt at the Bank of Japan meeting on December 19. BOJ Governor Kazuo Ueda said the committee would “seriously” assess the impact of the weak JPY on inflation and the economy while Prime Minister Shigeru Ishiba pushed for significant wage increases at the shunto negotiations next spring.
The European currencies regained their composure. EUR/USD appreciated 1.4% to 1.0566 after hitting the year’s low of 1.0418 last Friday. European Central Bank board member Isabel Schnabel narrowed the gap with the Fed by pushing back dovish rate cut bets in the Eurozone. EU CPI inflation returned to the 2% target in October after a brief dip to 1.7% YoY in September, with core inflation remaining high at 2.7%. Eurozone recession fears were not validated by GDP growth which improved to 0.4% QoQ sa in 3Q24 from 0.2% in 2Q24. GBP/USD recovered to 1.2680 after failing to break below 1.25 in the past three sessions. Bank of England officials did not signal another cut in December after its 25 bps cut to 4.75% on November 7.
We are guarded against the complacency that financial markets are exhibiting regarding Trump’s transactional approach to his aggressive trade policies. The CAD and MXN have been weaker by 0.4% and 0.8% since last Friday, a sign not to underestimate Trump’s tariff threats widening trade conflicts. Responding to Trump’s plans to impose 25% tariffs on all Canadian and Mexican goods entering America, Mexico has threatened to retaliate with its own tariffs, with Canada reportedly examining the same response. While markets have cheered Bessent’s nomination, Trump has filled key cabinet positions with China hawks. With Trump’s inauguration still six weeks away on January 20, 2025, Trump’s tariff threats are potentially a strategic move to evaluate the reactions of domestic and international stakeholders before actual policy formulation and implementation. We remain vigilant against more volatility, mindful that Trump is also unpredictable.
Quote of the Day
“I always tried to be correct, not politically correct.”
Lee Kuan Yew
November 28 in history
Lee Kuan Yew resigned in 1990, ending his term as Singapore’s longest-serving prime minister.
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