The DXY Index rebounded by 0.6% to 106.40 on Monday, partially reversing last week’s 1.7% losses. US President-elect Donald Trump reminded markets again that he was entering office with aggressive protectionist policies next month. This week, Trump threatened to impose 100% tariffs on BRICS countries if they try to create an alternative currency to rival the USD, adding to fears of a widening trade war. Last week, he threatened to impose 25% tariffs on all Mexican and Canadian goods entering America unless they address unauthorized migration to the US and combat illegal drug trafficking. Trump also threatened an additional 10% tariff on all Chinese imports. Despite recent discussions between Trump and the leaders of Mexico and Canada, there has been minimal progress toward resolving the disputes.
JPY crosses were pressured by diverging BOJ-Fed policy rate expectations. The futures market increased the odds for a rate cut at the FOMC meeting on December 18 to 76.2% on Monday from 66% last Friday. Fed Governor Christopher Waller and New York Fed President John Williams maintained the narrative of continuing rate cuts over the next year to neutral. Despite expectations for this Friday’s US nonfarm payrolls to rebound to 200k in November from 12k in October, Williams did not expect the labour market to be a source of inflation. In Japan, the OIS market sees a 64.7% chance of a hike at the BOJ meeting on December 19. On Monday, the 10Y JGB yield rose 3.2 bps to 1.08%, its highest close since November 22, and extended USD/JPY’s decline below 150 to 149.60. Bank of Japan Governor Kazuo Ueda hinted that the conditions for another rate hike were coming into place, i.e., encouraging wage trends, the JPY’s weakness, and economic data were on track to meet its forecasts.
According to CFTC data, net long JPY positions declined against the AUD, NZD, EUR, GBP, and CAD last week after two months of increases. AUD/JPY descended to 97.60 after breaking below the critical 100 level on November 27, approaching September’s lows around 95. During the aggressive unwinding of JPY crosses in July-August, AUD/JPY almost hit 90 on August 5. Despite the Reserve Bank of Australia delaying rate cuts to next year, the AUD is not immune to the tariff worries hanging over East Asia, its largest export destination. However, it was the EUR’s sell-off below 1.05 that attracted attention of bears eyeing parity. The OIS market did not abandon its bet for the European Central Bank to deliver a large 50 bps cut at its meeting on December 12. France is also facing a political crisis. Prime Minister Michel Barnier’s government risks collapse from no-confidence motions lodged by the far-right and left-wing parties, which appear to be positioning for the June 2025 elections. Brace for more drama.
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