The US dollar is primarily stabilizing in low-volume trading against the G10 currencies as the new week begins, with expectations mounting for the Federal Reserve to implement a third interest rate cut. The Reserve Bank of Australia convenes tomorrow, and there is anticipation that it may indicate its forthcoming decision is an increase. The Bank of Canada remains in a holding pattern. The Swiss National Bank shows hesitance in moving its deposit rate, currently at zero, into negative territory. Emerging market currencies exhibit a varied performance. The Mexican peso and Chinese yuan, having reached new highs for the year last week, are now experiencing consolidation at marginally lower levels. It is noteworthy that the Thai baht stands out as the strongest currency among emerging markets, even in light of the recent tensions with Cambodia. Meanwhile, tensions between China and Japan continue to be elevated.

Global equities are predominantly on the rise. In the Asia Pacific region, Hong Kong and the mainland shares traded there, along with India and Australia, stand out as significant exceptions. Taiwan and South Korea demonstrated a strong performance, each achieving gains exceeding 1%. Europe’s Stoxx 600 shows a modest increase near midday, alongside a similar trend in US index futures. Bonds, however, face significant pressure. Japan and Australia’s 10-year yields have increased by approximately two basis points, whereas New Zealand’s benchmark has surged by eight basis points. European yields have increased by 3-4 basis points. The US 10-year Treasury yield has increased by more than a basis point, approaching 4.15%, marking a new peak since November 20. The rate has remained below 4.20% since early September. Gold remains relatively stable, trading around $4200. January WTI concluded last week just above $60, but has since dipped below that level and is at risk of breaching last Friday’s low around $59.40.

The Dollar Index has established a low in recent sessions, hovering around 98.75-98.80. The specified area corresponds to the (38.2%) retracement of the upward movement that began from the year’s low established on September 17, coinciding with the Fed’s initial rate cut of the year. Tomorrow’s October JOLTS report and Wednesday’s Q3 Employment Cost Index may draw some interest, but the primary focus will be on the results of Wednesday’s FOMC meeting and the forward guidance outlined in the updated Summary of Economic Projections. The Federal Reserve might address the balance sheet, with anticipation surrounding potential purchases of T-bills to enhance bank reserves. Market participants recognize the trend where the dollar tends to strengthen following rate cuts in September and October. Prior to the rate cuts, there was a sell-off of the dollar. Two-year Treasury yields decline as market participants anticipate rate cuts, subsequently rising following both actions. However, the two-year yield increased by approximately eight basis points last week. The 10-year yield experienced an increase following the movements in September and October, climbing by a dozen basis points last week to attain its peak level in two and a half weeks.

The euro fluctuated last Friday within a range of approximately 20 ticks around $1.1650. The euro experienced a pause last week just ahead of the (50%) retracement of its declines from the peak reached on September 17, close to $1.1920. Over the past four sessions, the euro has fluctuated within the range of approximately $1.1620 to $1.1680. In light of the recent pre-weekend announcement, October factory orders experienced a notable increase of 1.5%, following a revised 2% rise in September, which was adjusted from an initial 1.1%. Additionally, Germany reported a significant 1.8% increase in industrial output, marking the largest gain since March, after a revised 1.1% rise in September, which was initially reported as 1.3%. The performance over the past two months has been the strongest since 2021. The surge in activity observed in Q1, characterized by an average monthly increase of 0.9% in industrial output, appears to be an anomaly. Over the next half year, industrial production experienced a decline averaging 0.5% per month. Germany’s trade figures for October are set to be released tomorrow. However, despite a decline in industrial output through September, exports have continued to show an upward trend. The average increase has been 0.1% per month during the initial nine months of the year, consistent with the January to September 2024 timeframe. Despite the increase in exports, the trade surplus as of September is approximately 20% smaller than it was a year prior, standing at around 151 billion euros.

The dollar has been on a downward trajectory against the yen since reaching its peak on November 20, close to JPY157.90. Last week, it tested the JPY154.65 level on an intraday basis, aligning with the (38.2%) retracement of the dollar’s ascent since the low of October 17 (~JPY149.40), marking the last occasion the dollar was below JPY150. However, the dollar did not dip below that level at any point, and in fact, it reached a three-day high ahead of the weekend. Today, it achieved a slight new three-day high close to JPY155.55. If this segment of the dollar’s decline has concluded, initial resistance could reach the JPY156.10 region. Earlier today, the report on Japan’s labor earnings for October was released. Cash earnings experienced a year-over-year increase of 2.6%, following a revised rise of 2.1% in September, which was initially reported at 1.9%. In October, real earnings experienced a year-over-year decrease of 0.7%, following a 1.3% drop in the year ending September. At the conclusion of last week, it was revealed that household spending experienced an unexpected decline of 3% over the 12 months leading up to October, primarily due to reduced expenditures on housing and transportation. Japan has revised its Q3 GDP figures, now indicating a contraction of 0.6% rather than the previously reported -0.4%. However, private consumption saw an increase of 0.2%, up from the earlier estimate of 0.1%. Lastly, Japan reported a current account surplus of JPY2.9 trillion in October. In the initial ten months, Japan’s current account surplus has increased by approximately 14% compared to the corresponding period last year. As of October, the yen has strengthened by approximately 2% relative to the dollar. This suggests that Japanese investors are not merely reinvesting the current account surplus, but they have also counterbalanced the foreign capital inflows.

Sterling demonstrated strong performance last week, increasing for the fourth time in the last five weeks. It appreciated by approximately 0.75% against the dollar, achieving its highest level (~$1.3385) since October 22. The advance achieved the 50% retracement target of the decline that began from the high on September 17, approximately $1.3725. The upcoming retracement level at 61.8% is approximately $1.3450. However, some consolidation appears probable before the subsequent upward movement. It declined to a slight new three-day low today near $1.3315. Initial support could be observed in the $1.3280-$1.3300 range. The key data point to watch this week is the October GDP report scheduled for release on Friday. A modest uptick is anticipated. Nonetheless, the primary emphasis is on the upcoming central bank meeting next week. The market exhibits confidence in a quarter point reduction.

In anticipation of the weekend, the market exhibited a significant response to the November employment report. The notable decline in the unemployment rate to 6.5% from 6.9% appeared to engage the market’s attention, despite the fact that a significant portion of this change could be attributed to the decrease in the participation rate. Additionally, there was a decline in full-time positions, totaling 9.4k. This marks the initial occurrence of consecutive full-time job losses since the period of February-March. The Canadian dollar appreciated approximately 0.85%, marking its highest increase since late May. The greenback fluctuated slightly around the (50%) retracement level of its ascent since the year’s low was noted in mid-June. The greenback is experiencing subdued trading within a tight range in the pre-weekend trough. The forthcoming retracement level at 61.8% is approximately CAD 1.3770. The Bank of Canada is scheduled to convene on Wednesday, with all 21 economists anticipating no alterations to the current policy. The central bank has reduced its overnight lending rate by 100 basis points this year, with the most recent adjustment occurring in October. It provided 175 basis points of reductions last year. The market perceives that the easing cycle has reached its conclusion and has gained further confidence following the fiscal expansion outlined in the government’s latest budget. Following the jobs data, the swaps market experienced a significant shift, almost entirely pricing in a rate hike by early Q4 next year.