The dollar index (DXY00) recovered from a 1.5-week low today and is up by +0.16%.  The dollar is rallying on today's better-than-expected US Jan payroll report, which pushed T-note yields higher and dampened speculation of additional Fed interest rate cuts.  The chance of a Fed rate cut at next month's FOMC meeting fell to 6% from 23% before the release of today's monthly payroll report.  Hawkish comments today from Kansas City Fed President Jeff Schmid also supported the dollar when he said the Fed should ...

Core Viewpoint - The foreign exchange markets are on alert for potential official yen buying due to a recent spike in the currency and a commitment from Japanese Prime Minister Sanae Takaichi to counter speculative market movements [1][4]. Group 1: Yen Movement and Market Reactions - The yen experienced its sharpest rise in nearly six months, closing at 155.73 per dollar, following a decline towards 160, which is perceived as a threshold for potential intervention [2][5]. - The New York Federal Reserve's rate checks were interpreted by traders as a signal for possible joint U.S.-Japan intervention to stabilize the yen [2][4]. - The yen's recent volatility has made short sellers anxious, as any intervention could lead to significant losses for them [2] Group 2: Economic Implications - The depreciation of the yen has raised import costs and inflation, negatively impacting household purchasing power in Japan [5]. - Since Takaichi assumed leadership of Japan's ruling party, the yen has depreciated over 5% against the dollar, coinciding with rising bond yields due to concerns over increased government borrowing [5]. - The yen recently hit record lows against the euro and Swiss franc, but there is speculation that it could rally if U.S.-Japan buying is anticipated [6]. Group 3: Government Stance and Future Actions - Japanese officials, including Finance Minister Satsuki Katayama, have expressed concerns regarding the yen's "one-sided depreciation" and its economic repercussions [7]. - Takaichi's statement about taking necessary steps against abnormal market movements indicates a proactive approach from the government to manage currency fluctuations [4].

Core Insights - Ray Dalio warns of sustained long-term weakness of the US dollar against gold and major currencies, predicting a decisive shift in global capital flows by 2025 [1] - The dollar has declined 39% against gold, 12% against the euro, and 13% against the Swiss franc [1] - Gold has returned 65% in dollar terms, significantly outperforming the S&P 500 by 47% [2] Currency Performance - The S&P 500 fell by 28% in gold-money terms, while European stocks outperformed US equities by 23% and Chinese stocks by 21% [3] - The decline of the dollar is attributed to structural fiscal imbalances and changing expectations for monetary policy [3] Debt and Fiscal Policy - A significant amount of debt, nearly $10 trillion, will need to be rolled over, with simultaneous Fed easing making debt assets less appealing [4] - The expectation of a further steepening of the yield curve is probable [4] Political and Economic Implications - Current policies aimed at revitalizing manufacturing are widening wealth gaps, with the affordability issue expected to be a major political topic [5] - Geopolitical shifts are accelerating dollar weakness, with a transition from multilateralism to unilateralism noted for 2025 [6] Financial Conditions - The US bond market is experiencing its steepest yield curve since 2021, with a spread of 140 basis points between two-year and 30-year Treasuries [7]

Core Viewpoint - The euro is currently lower against the dollar, and its rebound has been less than expected according to modeled paths, leading HSBC to suggest that the euro appears cheap [1] Summary by Relevant Sections - Currency Performance - The euro has depreciated against the dollar [1] - The rebound of the euro has not met the expectations set by its modeled path [1] - Investment Insight - HSBC indicates that the euro looks cheap at its current valuation [1]

Core Viewpoint - The U.S. dollar has experienced significant depreciation this year, with expectations of continued challenges ahead [1] Currency Performance - The U.S. dollar index is currently at 98.96, a decline from 109 earlier this year [1] - The dollar has particularly weakened against the euro, with the exchange rate moving from $1.08 to $1.16 per euro [1]

Core Viewpoint - The central bank's modeling indicates a significant reduction in inflation over the next three years, attributed to a 10% increase in the euro's exchange rate [1] Group 1 - Chief Economist Philip Lane highlighted the impact of the euro's exchange rate on inflation forecasts [1]

Core Insights - The Swiss franc has reached a 10-year high against the euro, driven by expectations of persistent inflation and potential reductions in US tariffs, leading to increased demand for the currency [1][3] - The franc's rise is supported by comments from the Swiss National Bank (SNB) indicating a slight increase in inflation, which has reduced speculation about a return to negative interest rates [2] - Hedge funds are positioning for further appreciation of the franc, particularly against the euro and yen, as December is historically a strong month for the currency [4] Currency Performance - The Swiss franc increased by 0.4% to 0.91862 per euro, marking its strongest level since January 2015 [1] - The current upward trend is on track for a seventh consecutive daily gain, the longest winning streak since August 2024 [1] Market Sentiment - Money markets have decreased the probability of negative interest rates to less than 30%, down from approximately 64% a month ago, reflecting a shift in market sentiment [2] - Reports of Switzerland nearing a 15% tariff reduction on exports to the US have further bolstered the franc [3] Hedge Fund Activity - Hedge funds are increasingly betting on the strength of the franc against the euro and yen, indicating a bullish sentiment in the market [4] - There is a potential for long positions against the US dollar as well, given the historical performance of the franc in December [4]

Market Sentiment - Risk-off sentiment has been pervasive across markets, leading to a stronger USD against most currencies, with the exception of JPY [1][9] - The Australian dollar and New Zealand dollar have been particularly weak, with the latter reaching a nearly seven-month low following a rise in the unemployment rate [9][10] Currency Performance - The U.S. dollar index was steady at 100.18, having reached as high as 100.25 for the first time since August 1 [5][10] - Sterling is near a seven-month low after UK finance minister Rachel Reeves hinted at broad tax rises in her upcoming budget [1][2] - The New Zealand dollar fell to $0.5635 after a 1.2% drop on Tuesday, marking a seven-month low [7][10] Stock Market Trends - Selling pressure dominated Asian stock markets, with Japan's Nikkei dropping 2.4% and South Korea's KOSPI plunging 4.8% [4][9] Economic Indicators - The ongoing government shutdown in the U.S. has halted the flow of macroeconomic data, increasing focus on private ADP payrolls [6][10] - The Reserve Bank of Australia's recent policy statement was not perceived as hawkish, contributing to the weakness of the Australian dollar [8][10] Cryptocurrency Market - Bitcoin experienced a 6.1% decline on Tuesday, reaching its lowest level since June 22, trading around $100,317 [8][10]

Core Viewpoint - The election of hardline conservative Sanae Takaichi as Japan's prime minister has led to a decline in the yen, with traders speculating on potential changes in interest rate outlook and increased fiscal spending [1][2]. Currency Market Impact - The yen fell 0.76% to 151.895 per dollar, marking its lowest level since October 14, and experienced its largest single-day decline in two weeks [2]. - The yen also faced challenges against the euro and sterling, indicating broader currency market pressures [2]. Government Appointments and Economic Policy - Takaichi plans to appoint Satsuki Katayama as finance minister, who has previously expressed a preference for a stronger yen, potentially influencing market perceptions regarding yen depreciation [3]. - Analysts suggest that inflation and household purchasing power will be critical issues for the new government, which may lead to a reluctance to support further yen depreciation [4]. Monetary Policy Considerations - The Bank of Japan (BOJ) faces challenges in navigating monetary policy, as Takaichi's support for fiscal stimulus complicates the path for potential interest rate increases [4][5]. - There are indications that monetary tightening may be delayed until fiscal easing takes effect, creating a complex environment for the BOJ [5]. Broader Market Context - The dollar index rose to a six-day high, supported by the weaker yen, amidst a generally positive market sentiment following optimistic trade deal discussions between the U.S. and China [6][7]. - Concerns regarding U.S. dollar funding and its implications for euro zone banks were highlighted, reflecting the interconnectedness of global financial markets [7].

Economic Outlook - The Australian dollar rose by 0.3% to $0.6504, buoyed by positive economic data from China and a more optimistic trade outlook [1][4] - China's economy grew by 1.1% in Q3, surpassing forecasts, with industrial output increasing by 6.5%, although the annual growth rate of 4.8% was the weakest in a year [2][3] - Analysts suggest that China is on track to meet its growth target of around 5%, indicating resilience against U.S. tariffs [3] Political Developments - The yen weakened initially as Sanae Takaichi appeared set to become Japan's next prime minister, following crucial political backing [1] - Takaichi's bid for premiership was bolstered by an alliance with the Japan Innovation Party, aligning more closely with her policy views after a previous coalition breakup [5][6] - The market is reacting positively to the potential for Takaichi's leadership, leading to bullish equities and bearish sentiment towards the yen [5] Market Sentiment - Market analysts indicate a sense of "mutually assured destruction" regarding U.S.-China trade tensions, with both sides acknowledging the risks of escalating tariffs [4] - There is a prevailing sentiment that markets will remain jittery until explicit announcements of de-escalation are made [5]