The Federal Reserve
The final trading week of the year, before liquidy dries up, is poised to be pivotal, with several key central bank meetings on the docket, the most critical being the Federal Reserve and then the Bank of Japan.
On December 18th, the Federal Reserve is poised to trim interest rates by 25 basis points, nudging policy from the tight grip of restriction closer to a neutral stance. Despite this easing, with inflation continuing to cling stubbornly high and President-elect Trump's aggressive push to supercharge U.S. economic growth, the Fed is expected to outline a more conservative approach to rate cuts for 2025.
With the U.S. rates futures market already dialled in, anticipating a modest 75 basis points of rate cuts next year, if the Fed's dot plot echoes these conservative expectations, it's unlikely to ignite a rally in the dollar—especially given the typical end-of-year softness in the currency.
However, the real twist could come from hints of a longer-than-expected pause in rate cuts, which might shift the narrative and strengthen the dollar's position. As the market hangs on every word, the nuances revealed in the post-FOMC press conference will be critical, potentially reshaping dollar dynamics as traders parse the subtleties of the Fed’s forward guidance.
The Bank of Japan
Nothing was leaked in the press about a Bank of Japan rate hike this week, so by all accounts, they will be taking a cautious stance as board members evaluate global risks and next year's wage trends. This pause sets the stage for a potential rate hike in early 2025. March ( or January, depending on wage pressure) is a window, primarily if the Bank of Japan can assess the impact of U.S. trade policies and China's currency strategies. So, there is much external noise beyond domestic economic trends.
Sources suggest a split within the BOJ, with some board members ready to hike rates based on current economic indicators. In contrast, others advocate for a wait-and-see approach due to the subdued inflation and the recent yen strengthening, which has eased import price pressures. This contrasts sharply with July’s rate hike amid a weakening currency and rising import costs.
The decision appears to hinge on sustained wage growth and its effect on prices. While there are signs of firms raising service prices in response to higher wages, these are not yet strong enough to trigger a concerning wage-price spiral.
Acting prematurely could signal to markets that the BOJ hastened to normalize rates, a move the Japanese government wishes to avoid disturbing the still-recovering economy.
Further complicating matters is the uncertainty surrounding U.S. President-elect Donald Trump’s economic policies, which BOJ Governor Kazuo Ueda has flagged as a significant external risk. This global economic uncertainty, coupled with the upcoming U.S. Federal Reserve decision—expected to cut rates—adds complexity to the BOJ’s rate path considerations.
Trump Tariffs
The next few weeks feel like a mere formality before the start of the Trump Tariffs.
As we edge closer to President Trump's expected tariff onslaught, global trading partners are scrambling to bolster their domestic economies through measures like fiscal stimulus. China is at the forefront of this initiative. At the same time, political deadlock in Europe—particularly in France and Germany—places the onus on the European Central Bank to dive deeper into rate cuts, potentially driving the EUR/USD towards parity in the coming year.
The forecasted rise in U.S. trade tariffs for 2025 threatens destabilizing currencies across smaller, open economies and major commodity-exporting nations. Amid a broadly strengthening dollar, the Japanese yen, undervalued and currently being overlooked alongside sterling, could emerge as the dark horse in the G10 currency race.
Emerging markets are bracing for a stormy 2025 as increased trade pressures coincide with a predicted surge in U.S. Treasury yields. The spotlight intensifies on China’s FX policy—will Beijing ignite a new currency war by devaluing the yuan? The consensus leans towards stability, with China likely holding the yuan steady to preserve financial equilibrium and fend off further U.S. tariffs. This is critical to our yen view as if we head for a competitive currency devaluation scenario triggered by the PBoC letting the USDCNH float higher, all stronger yen bets are off.
In Asia, the Korean won stands on precarious ground, emblematic of the broader regional susceptibility to economic turbulence. Over in Central and Eastern Europe, the Czech koruna is tipped for resilience. At the same time, Latin America prepares for a rough ride, with currencies like the Mexican peso poised to face more significant challenges than during Trump’s initial presidency as they grapple with the dual threats of potential tariffs and escalating U.S. yields.
Asia Wrap
China's retail sector hit a snag, with November's sales growth cooling to a mere 3% year-over-year, the slowest in three months and a significant downturn from October’s 4.8% increase. This deceleration underscores the fleeting impact of recent stimulus measures and compounds intraday pressure on the ringgit, given Malaysia's significant export relationship with China.
The slowdown in consumer spending arrives at a critical juncture as Beijing faces heightened global scrutiny over its trade policies. With Donald Trump's re-election, the spectre of escalated trade wars threatens to undercut further the pivotal role exports have played in China’s economic expansion this year.
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