US
USD is trading on the defensive against most major currencies. USD has room to edge down to the lower-end of its June-December range as it converges towards the level implied by US-G6 rate differentials.
Fed speakers today include: staunch dove Fed Governor Stephen Miran (2:30pm London, 9:30am New York) and influential New York Fed President John Williams (3:30pm London, 10:30am New York). Remember, it was a dovish speech by Williams on November 21 that revived December Fed funds rate cut bets.
JAPAN
USD/JPY is down near 155.00. Japan’s Q4 Tankan business survey was strong and points to ongoing economic activity. The all industries business conditions index improved to 17 (highest level since Q3 2018) vs. 15 in Q3 and the details were good. The Bank of Japan (BOJ) is widely expected to raise the policy rate 25bps to 0.75% (Friday). It will be the first rate hike since January. We see room for USD/JPY to adjust lower towards the level implied by US-Japan two-year bond yield spreads around 140.00.
CANADA
USD/CAD is heavy near recent lows around 1.3765. Canada November CPI is due today (1:30pm London, 8:30am New York). Headline is seen at 2.3% y/y vs. 2.2% in October while core (average of trim and median CPI) is expected at 2.9% y/y vs. 2.95% in October. The Bank of Canada (BOC) projects headline and core inflation to average 2.0% y/y and 2.9% y/y over Q4, respectively.
At last week’s meeting, the BOC kept the policy rate unchanged at 2.25% as expected. The BOC emphasized again that it “sees the current policy rate at about the right level to keep inflation close to 2%.” The BOC leaned slightly against market expectations for rate hikes cautioning that “uncertainty remains elevated.” Still, the swaps curve implies a 25bps rate increase to 2.50% over the next twelve months. We expect USD/CAD to edge lower and stabilize between 1.3500-1.3600.
CHINA
USD/CNH dropped under 7.0500, to its lowest level since October 2024. China’s November real sector data was weak. In the eleven months of the year, retail sales growth unexpectedly slowed to 4.0% y/y (consensus: 4.3%) vs. 4.3% in October, industrial production growth matched consensus at 6.0% y/y vs. 6.1% in October, and fixed asset investment growth slumped more than expected by -2.6% y/y (consensus: -2.3%) vs. -1.7% in October. Excluding real estate development, fixed asset investment growth was 0.8% y/y vs. 1.7% in October.
In our view, a continued appreciation in China’s currency could help the country shift its growth model towards consumer spending by boosting disposable income through cheaper imports. Bottom line: USD/CNH downtrend is intact.
NEW ZEALAND
NZD underperforms across the board. RBNZ Governor Anna Breman pushed back against market expectations for rate hikes next year. Breman cautioned that the bank’s policy rate forecast “indicates a slight probability of another rate cut in the near term…However, if economic conditions evolve as expected the OCR is likely to remain at its current level of 2.25% for some time.”
The swaps curve price-in nearly 50bps of hikes over the next twelve months. Without positive data surprises, the RBNZ will struggle to deliver the hikes priced-in, and NZD upside will be limited. Next major resistance for NZD/USD is offered at the 200-day moving average (0.5861).
CHILE
CLP has outperformed most Latam currencies so far this month, reflecting the rally in copper prices and a political shift to the right. Hardline conservative José Antonio Kast won Chile’s presidency by a landslide, receiving 58% of the vote, followed by leftist Jeannette Jara with 42%. Kast will take office on March 11 with a promise to cut taxes and regulations. Chile’s central bank is expected to cut rates 25bps to 4.50% tomorrow due to a soggy growth backdrop and easing inflation pressures.
