Macro/FX Watch: US exceptionalism still lingers

USD: Consolidation likely into month-end and Thanksgiving flows

The dollar started the week on a very weak footing, but recovered some of its losses overnight as the moves went too far too fast. DXY index touched near 12-week lows of 103.18 and closed below the 200DMA yesterday but just above the 50% fibo retracement of July low from October high. Momentum is still bearish as markets continue to discount Fed’s higher-for-longer and bring forward the rate cut pricing for 2024. Key levels to watch will be the 61.8% fibo retracement at 102.55. We remain of the view that real rates are too high and could break something. The Fed will remain cautious of that, especially in an election year, and this suggests there is still more room to bring rate cut expectations forward.

However, it remains to be seen how much the bump higher in oil prices upsets the disinflation and economic slowdown story. So far, oil price gains do not appear strong enough to counter the weakening consumer but sensitivity could be higher as excess savings have run out for majority of the income distribution. FOMC minutes from the November meeting reiterated Fed’s coordinated cautious posture, as risks to inflation are still seen on the upside but there were also warnings on tightening financial conditions and fading consumer finances. Big retailers in the US have also been sending warnings on consumers pulling back on big ticket item purchases ahead of the holiday season, and Best Buy and Lowe’s were the latest to join the club of warnings last night with a cut in their forecasts.

Having said that, a weakening US economy does not translate into underperformance of the US economy relative to its peers. The US exceptionalism story has more room to run, which suggests that a sustained downside in dollar could be unlikely. Dollar also still has a heavy yield and carry advantage, and could continue to find intermittent support on dips despite a broader bearish picture. Lastly, soft landing hopes will likely get a reality check in early 2024, further boosting the dollar’s safe-haven appeal. But for now, soft landing hopes, seasonality and yuan strength, all point to a further dollar negative.

Market Takeaway: Bearish picture remains in place in the short-term, but some consolidation/recovery likely ahead. Watch for a move back above 104/104.40 or a break below 102.55.

GBP: Tax cuts eyed

Cable had a strong showing yesterday despite some gains in the dollar. GBPUSD rose to fresh 2-month highs of 1.2559, breaking above the 100DMA. While Fed, BOE and ECB speakers continued to emphasise higher-for-longer, the message continues to find more footing from the BOE rather than the Fed and ECB. Governor Bailey said inflation risks were still on the upside, with wage pressures and Mideast conflict risks underpinning. Mann and Ramsden also said a further interest rate increase was warranted. Haskel suggested disinflationary goods dynamics could be less helpful going forward than in the post-GFC period. Key level to watch now will be the 50% fibo retracement of October low from July high at 1.2589. More data weakness may need to come through to push markets towards a dovish repricing of BOE. EURGBP moved towards the 0.87 handle and Thursday’s PMI readings for Eurozone and UK could be key to assess relative performance.

But for now the focus turns to the autumn budget statement due today from UK Finance Minister Jeremy Hunt. Expectations of tax cuts have risen after PM Sunak’s comments earlier this week. He said that his UK government can begin to cut taxes after inflation has been halved as they expected. UK public finances showed that April-October borrowing of GBP 98.3bn is GBP 16.9bn less than the OBR forecast in March, buoyed by receipts from VAT, income tax and corporation tax that are about 10% higher. This suggests that there is more fiscal room than previously thought. The Times reported that Hunt would cut the headline rates of national insurance for around 28 million people and make tax incentives for business investment permanent.

The announcement can spark volatility in Gilts and GBP. Growth forecasts are likely to be downgraded and market lacks conviction that BOE’s job on inflation is done. Opening the fiscal taps too early could stoke reflation concerns, and bring back memories of the Kwarteng mini-budget last year. There is possibly a thin line between supporting sentiment on tax cuts and stoking inflation fears at this point.

Market Takeaway: GBPUSD could be poised for volatility amid the announcement of the autumn statement. A move above 1.26 could reaffirm bullish momentum while October highs of 1.2337 could provide support.

CNH: PBoC boost could continue

USDCNH bounced higher from 200DMA yesterday as dollar reversed some of its losses, after USDCNH moved from 7.30 to near 4-month lows of 7.1286 in the last few days. A combination of weaker dollar, along with China’s ramping stimulus measures, easing US-China tensions and strong yuan fixings from PBOC have underpinned. Today’s fixing at 7.1254 was again stronger than expected and the lowest since June, and there are signals that the PBOC could remain committed to strengthening yuan further to help make room for any rate cuts that may be needed to boost 2024 growth.

Market Takeaway: Further pullback could test 38.2% fibo retracement of September high from January lows at 7.1120 and break of this could accelerate the move towards the 7 handle.

JPY: Watch jobless claims tonight

Yen and yuan continue to have the largest potential to outperform if the dollar trajectory turned lower. USDJPY slid from ~152 levels to lows of 147.15 yesterday before a recovery back to 148+ levels later. Reversal may be a signal of short-covering, but if the US yields continue to slide lower on the back of increasing pricing for rate cuts for 2024, then the gap to Japanese yields will continue to diminish and this suggests that the path of least resistance for USDJPY is now lower. The move may remain bumpy due to the long-end Treasury yields still seeing upside risks given the US fiscal situation and a huge Treasury supply. But any further dovish data or comments hinting at the need to start Fed easing cycle sooner than currently anticipated will be a positive for yen. Today’s jobless claims could remain key in that regard, as they offer an early window into the fundamentals of the US labor market. Consensus for initial claims is 227k, after the pickup to 231k from 218k last week.

Market Takeaway: Another spike in jobless claims today can bring USDJPY lower to test the 100DMA at 146.61 or the 146 handle.