FX Daily: EMFX Year-End Strength and Market Focus
The global currency markets are witnessing a positive close to the year, with emerging market (EM) currencies leading the charge. This is primarily due to lower core policy rates, a modestly weaker US dollar, and attractive carry trades. The spotlight is on the Chinese renminbi, with China's $1 trillion trade surplus sparking debates about its potential to strengthen the currency further.
USD: Jobs Report and Market Dynamics
Today's economic calendar features a dual-release of job hiring data for October and November, with expectations of a modest +50k jobs increase for November and a slight rise in the unemployment rate to 4.5%. The market's focus is on the Federal Reserve's policy decisions, with the next 25 basis point cut priced in by April and another by September. Interestingly, US money markets have reacted to the Fed's T-bill buying plans, causing three-month dollar hedging costs to drop to September 2022 levels.
Additionally, October retail sales data and S&P PMIs will be released, but their impact on dollar volatility is expected to be minimal.
EMFX and the Renminbi's Influence
The renminbi's performance is crucial in shaping the broader EMFX landscape. The USD/CNH approach to 7.00, despite disappointing Chinese activity data, has reignited interest in the currency. China's $1 trillion trade surplus in the first 11 months of the year has fueled speculation that Chinese exporters are holding off on selling their foreign exchange earnings. However, a debate emerges regarding the local authorities' willingness to allow a stronger renminbi to rebalance the economy away from exports.
The People's Bank of China (PBoC) has been fixing USD/CNY higher than model-based estimates, a rare occurrence in recent years. This shift in policy suggests a potential shift in the renminbi's trajectory, impacting EMFX pairs like USD/MXN and USD/ZAR.
Dollar Outlook and Seasonal Factors
The strong interest in EM currencies typically has a mild negative impact on the US dollar. Seasonal factors further support a mild dollar weakening into year-end, provided the NFP data doesn't significantly surprise on the upside. The DXY index could edge towards 97.80 below 98.00, with 98.80 acting as intraday resistance.
EUR: PMI Focus and ECB Meeting
The European Central Bank (ECB) meeting on Thursday will be a pivotal event. Today's focus on French, German, and eurozone PMIs, coupled with encouraging industrial production data, aims to boost European industrial confidence. Lower energy prices and potential delays in phasing out combustion engines contribute to a positive euro outlook.
The EUR/USD pair's intraday support level is expected at 1.1720/25, with a move through 1.1780 opening the door to 1.1800/1820.
UK Private Sector Wage Data and Sterling
The Bank of England's rate cut on Thursday is contingent on today's UK private sector wage data. Short sterling positioning suggests a potential reduction in speculative positions, which will be revealed in the next report on December 2nd, after the Budget.
HUF: Dovish Risks and Central Bank Outlook
The National Bank of Hungary is expected to maintain its 6.50% interest rate today, with a focus on the central bank's forecast and forward guidance. The market anticipates a minor reduction in 2026 inflation forecasts and a potential upward revision in 2027, driven by base effects.
The market's hawkish stance, with almost three rate cuts priced in, introduces a risk of a dovish shift. The central bank's openness to rate cuts next year will be a key indicator, with the EUR/HUF pair stabilizing at 384-385 yesterday, but facing a higher risk of a weaker forint today.
CZK: Mixed News for the Czech Crown
The new Czech government's appointments have brought mixed news for the CZK. While the absence of fiscal easing is positive for foreign exchange, lower inflation and a higher chance of rate cuts from the CNB are negative. The CZK's rate pressure is expected to remain stable in the short term, but January may bring lower rate pressure as liquidity returns to the market.
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