Sample Category Title

• US equities finished strong, driven by tech and retail stocks, with the S&P 500 reaching record highs.
• The US dollar weakened due to increased expectations of a December rate cut by the Federal Reserve.
• The upcoming week’s focus is on US jobs data, which could impact the Fed’s decision and the US dollar’s performance.

Week in Review: Geopolitics Drives Market Sentiment

A week largely dominated by geopolitical developments as the US celebrated the Thanksgiving Holidays ended with somewhat of a whimper. The lack of liquidity was evident on Thursday and Friday as markets looked to make sense of broad development along the geopolitical sphere.

Donald Trump kicked off the week with the threat of tariffs, his main targets being Mexico, Canada and of course China. Mexican President Claudia Sheinbaum did not take it lying down as she floated the idea of retaliatory tariffs. Brave of the incoming President but still a concern for market participants which also had an effect on currencies like Australian Dollar due to the country’s ‘commodity currency’ status and trade relationship with China.

Technically, Trump could use an executive order to implement tariffs on his first day in office. However, in reality, the timing is unclear. It’s likely the tariffs will be tied to his proposed tax cuts, and such a detailed plan would take time to get approval from Congress. Let’s see how this develops.

Israel and Hezbollah agreed to a ceasefire that began on Wednesday. Israel views its mission in Lebanon as a success, having eliminated much of Hezbollah’s leadership and destroyed many of its weapons. Hezbollah meanwhile views it as a success that Israel gained no ground in Southern Lebanon. A stalemate resembling the 2006 battle between the two. While the ceasefire offers hope in a conflict-filled region, achieving lasting peace will still take time.

The impact saw Oil prices face challenges as the geopolitical risk premium has for now at least disappeared. The only positive being that since an initial selloff on Monday Brent Crude prices remained rather steady for the rest of the week with a lot of choppy price action. Brent remains on course to finish the week around 3.1% down.

US equities enjoyed a surprisingly strong finish to the week with the S&P printing fresh record highs thanks to tech and retail stocks. Technology stocks, including Nvidia, helped raise the S&P 500, while industrial and financial stocks boosted the Dow. Nvidia’s stock went up by 2.4%.

Meanwhile, investors watched how shoppers reacted to big Black Friday discounts. Adobe Analytics predicted online spending would hit a record $10.8 billion, a 9.9% increase compared to last year’s Black Friday.

The S&P is on course for its biggest one-month rise since November 2023. The Russell 2000 index hit a record high earlier in the week, on pace for its steepest monthly rise so far this year.

The performance of Wall Street Indexes is reflected in fund flow data with investors pumping a substantial $12.19 billion into global equity funds, a jump of 32% compared with about $9.24 billion worth of net acquisitions in the week before, LSEG Lipper data showed. It marked the ninth consecutive weekly inflow.

Source: LSEG Data

The DXY struggled this week as the probability of a December rate cut from the Federal Reserve increased around 10%. A lot of this came down to the Fed meeting minutes release as well as robust jobs data.

Despite this USD weakness EUR/USD failed to break above the 1.0600 handle with Cable gaining some ground to trade back above the 1.2700 handle. Gold (XAU/USD) experienced a massive selloff to start the week but held above the $2600/oz handle before making its way back above the $2650/oz handle.

The precious metal will still finish the week down around 2% having traded at a peak of around $2720/oz in the early hours of Monday morning.

The Week Ahead: US Jobs Data to Dominate

Asia Pacific Markets

The week ahead in the Asia Pacific region sees an uptick in economic data releases.

In China, PMI data will be important this week. On Saturday morning, the National Bureau of Statistics (NBS) will release the official manufacturing and non-manufacturing PMI. There is an expectation that the manufacturing PMI will rise slightly to 50.3 from 50.1, showing signs of steady growth. The Caixin manufacturing PMI will be out on Monday.

In Japan, real cash earnings might see a small growth of 0.1% year-on-year in October. With strong labor earnings, the Bank of Japan could raise interest rates in December.

In Australia, markets have quite a bit of high impact data to deal with. Having had a bumper week in lieu of tariff threats against China which sent the Aussie through some volatility the week ahead may prove similar.

Retail sales kicks things off on Monday before we get some GDP data on Wednesday and to round the week off, trade balance data will be released on Thursday.

Europe + UK + US

In developed markets, the focus moves back to the US and jobs date with the NFP due out for release on Friday.

Last month, non-farm payrolls only increased by 12,000, much lower than expected. Hurricane Milton caused big job losses in Florida, where employment dropped by 38,000 compared to its usual growth of 13,000.

This suggests that Hurricane Milton has had a significant impact on payroll data, now with those issues out of the way there is a chance the number could be higher this week. A print around the 220k mark is very much a possibility with the unemployment rate also key to help the Fed ahead of the December meeting.

If unemployment rises to 4.2% and jobs growth comes in around the 220k mark there is a greater chance of a Fed rate cut in December and this could lead to US Dollar weakness.

In Europe and the UK there is a lack of high impact data releases. However we do have a speech by ECB President Christine Lagarde on Wednesday which could provide some insight into where the ECB is leaning regarding December rate cuts.

The slight improvement in Eurostat sentiment as well as the uptick in German inflation which rose to 2.2% year-on-year, up from 2.0% YoY in October will likely rule out a 50 bps cut. Any sign from Lagarde in her speech could stoke some short-term volatility for the Euro.

Chart of the Week

This week’s focus could have been either USD/JPY that has a broken a key medium-term ascending trendline or the chart i have chosen which is GBP/USD.

Cable has benefited from rising expectations that the Bank of England (BoE) will hold rates steady at the December meeting while the Fed are now projected to cut by 25 bps. The impact of this repricing has seen GBP/USD push away from support at the 1.2500 key level to trade just shy of resistance at 1.27500.

As things stand GBP/USD is at intriguing area heading into next week. Price is currently just below resistance at 1.2750 with a key confluence area around the 1,2800 handle where you have the descending trendline and the 200-day MA at 1.2819.

This as the RSI period 14 approaches the 50 neutral level with a break above likely signaling a shift in momentum. If this coincides with a trendline break bulls may be emboldened and this could push GBP/USD toward the 1.3000 psychological level once more. A lot of this will hing on the DXY as well and how the US Dollar performs next week.

A trendline rejection could lead to a retest of the 1.2750 and 1/2618 support areas. A break of these areas could see sellers return and push price beyond the previous lows of around 1.2480. An interesting week ahead indeed.Equity

GBP/USD Daily Chart – November 29, 2024

Source:TradingView.Com (click to enlarge)

Key Levels to Consider:

Support

• 1.2618
• 1.2500
• 1.2480

Resistance

• 1.2750
• 1.2800
• 1.2942

Canadian Highlights

• The threat of a 25% tariff on Canadian goods by President-elect Trump earlier this week impacted financial markets – pressuring the loonie lower by about 1.5%. It currently sits at 71 cents U.S.
• If implemented, the tariffs would result in a significant drag on the Canadian economy.
• GDP growth was soft in the third quarter, but the details were much stronger, supporting our call for a small rate cut as opposed to another 50-bps move.

U.S. Highlights

• The Federal Reserve’s preferred inflation metric, core PCE, accelerated to a six-month high in October.
• The Federal Reserve’s minutes from its November meeting showed members broadly favored a gradual return to a more neutral policy stance.
• President-elect Trump announced that he would implement a 25% tariff against Canada and Mexico, and an additional 10% tariff against China on inauguration day.

Canada – Scare Tactics

That didn’t take long. This week President-elect Trump surprised markets (and analysts) with the threat of a 25% across-the-board tariff on Canadian and Mexican-made goods, which would be implemented as soon as the incoming administration takes office in January. The clearest impact from this announcement was seen on the Canadian dollar, which dropped about 1 cent (or about 1.5%) on the news, before regaining some of that lost ground over the course of the week. Equities declined and bond yields continued their descent, although the relatively muted response suggests that markets have yet to fully embrace the potential downsides from a Canada/U.S. trade skirmish.

This threat isn’t to be taken lightly in our view. In a prior report, we analyzed a scenario where a 10% U.S. tariff was slapped on all Canadian exports, with in-kind retaliation by Canada (see here). We found that Canada’s economic growth would slow to a crawl, inflation would see a boost, and the loonie would tumble under 70 cents US (Chart 1). Obviously, a tariff rate more-than-double the one used in the analysis would exacerbate these already severe outcomes. All provinces would take a hit through weaker exports, although some (like Alberta, New Brunswick, and Ontario) would likely feel it more than others given their tight trade linkages with nearby states. Others, like PEI and Saskatchewan could see a larger inflation boost through Canadian tariff retaliation, given their relatively high concentration of U.S. content.

Fortunately, there’s at least one reason to be hopeful that this is a negotiating tactic. Namely, U.S. economic growth would suffer (see our latest Quarterly Q&A for a detailed analysis), given the deep interconnectedness of industries such as energy and autos between the U.S. and Canada. A trade clash between the two countries would deliver not only economic damage, but political pain for the U.S. This backdrop would also be negative for stock markets, which Trump has shown a sensitivity to in the past.

We’ve yet to incorporate these threats into our baseline view, but we’ll be watching. So will the Bank of Canada, which stands ready to incorporate whatever policies eventually do flow from the incoming U.S. administration, according to Deputy Governor Mendes this week. In the here-and-now, the Bank has an interest rate decision on December 11th and will be using the hard economic data to guide its actions.

Since the Bank’s October decision, we’ve seen a steady flow of hawkish data - like the recent back up in core inflation and a retail sales report that showed solid spending momentum heading into the final quarter of the year. This morning’s third quarter GDP report was another important piece of the puzzle before the December decision, and the data offered mixed messages. On the one hand, overall GDP growth was modest, and soft monthly showings in September and October will make the BoC’s call for a Q4 growth acceleration to 2% more difficult to achieve. On the other hand, domestic demand was solid, fueled by healthy gains in both goods and services consumption. Given this, a 25-bps cut (versus a larger 50 bps move) seems the more likely outcome next month.

U.S. – Turkey with a Side of Trade Uncertainty

The Thanksgiving holiday-shortened week came with several important updates on the economy, including a pulse check on the American consumer and the Fed’s preferred inflation metric. An additional layer of uncertainty was also introduced into the mix as President-elect Trump announced that he would implement tariffs on the nation’s three largest trading partners on the first day of his presidency. Financial markets were largely unperturbed by this news, as the S&P 500 rose 1.0% on the week, while the ten-year Treasury yield fell 20 basis-points (bps) as of the time of writing.

Financial markets are likely discounting the possibility of these tariffs actually being implemented, as a blanket tariff of at least 25% on roughly $1.3 trillion in annual U.S. goods imports would have broadly negative implications for the U.S. economy (see Question 1 here). Tariffs would also likely apply upward pressure to domestic inflation, chipping away at real income growth and complicating the ability of the Federal Reserve to normalize interest rates over the coming year. Whether these tariffs enter into force in two months’ time is unknown, but uncertainty related to foreign trade policy is likely to remain elevated under the incoming administration.

On the inflation front, price pressures appeared to rise in October, as the annual change in the Fed’s preferred price index, core PCE, hit a six-month high. The acceleration was driven by a broad-based uptick in non-housing services inflation (Chart 1). We don’t expect this to be a sustained deviation from the disinflation trend, with our baseline forecast for core PCE returning to the Federal Reserve’s 2% target by the second half of next year.

Elevated price growth last month still worked to take a bite out of real personal consumption expenditures (PCE) growth, as it decelerated relative to the prior month. Slower consumption growth was also in part driven by an uptick in the household savings rate for the first time in nine-months. Hurricane Milton’s impact on the southeast may have distorted the month’s data but spending is likely to pick up this month on the back of holiday shopping and Black Friday deals. In the fourth quarter we expect real PCE growth to decelerate relative to the prior quarter’s strong reading but remain healthy overall.

Cumulatively, the economy remains on a solid footing, which when combined with sticky inflation and elevated trade uncertainties supports the current patient approach adopted by the Federal Reserve over the past few months. The FOMC November meeting minutes released this week reiterated this sentiment, noting that a gradual normalization of monetary policy continues to be warranted by present economic conditions. Next week’s employment report will offer an important update for the Fed, with consensus expectations calling for 200k new jobs to be created after Hurricane Milton and the Boeing strike weighed on the prior month’s reading (Chart 2). Incoming data will continue to drive the Fed’s decisions moving forward, with market expectations currently pointing towards another 25bps cut in December.

Canadian and U.S. jobs reports on Friday will highlight the growing underperformance of the Canadian labour market compared to the U.S.

We expect Canadian employment edged up 10,000 with the unemployment rate rising to 6.7% in November from 6.5% in October. Canada has steadily posted job growth, but not fast enough to keep up with growth in the labour force as the population continues to rise rapidly. The past two months were an exception—the unemployment rate ticked lower for the first time since January in September and held at that level in October—but largely because of a sharp pullback in the share of, particularly younger, workers giving up their job search. The unemployment rate is still running almost 1 percentage point above year-ago levels and hiring demand has continued to slow with job openings falling. Data from the latest Survey of Employment Payrolls and Hours showed September job openings were still down 18% year-over-year. We expect the labour force participation rate to partially reverse the 0.3 percentage point decline over the last two months.

The U.S. labour market, on the other hand, has remained firm, supported by resilient economic growth. We look for U.S. payroll employment to bounce back 157,000 in November after a 12,000 increase in October. That October increase was the smallest rise since the pandemic, but the reading was distorted by disruptions from hurricanes and strikes. The unemployment rate (which is less impacted by those disruptions) is expected to hold steady at 4.1% for a third consecutive month in November. That would still be up from 3.7% a year ago, but below a recent “peak” 4.3% in the summer.

Beneath the surface, the U.S. labour market is still showing signs of softening. Job openings have continued to fall, and quit rates are at their lowest level since 2020. We continue to expect the unemployment rate will edge higher into next year, but it’s still historically low. We see it “normalizing” rather than faltering with support from an unusually large government budget deficit.

The Bank of Canada and U.S. Federal Reserve will take these employment readings into consideration before their final policy decisions of the year in December. We continue to expect deeper interest rate cuts will come from the BoC than the Fed in the year ahead, reflecting substantial and persistent underperformance in Canadian economic growth and easing inflation pressures.

Week ahead data watch

• We expect the Canadian trade deficit narrowed to $0.3 billion in October from -$1.3 billion in September, mainly driven by higher exports. Oil prices rose in October, pushing up the energy trade balance.
• We expect U.S. trade deficits narrowed to $75B in October. According to the advance trade report, the goods deficit shrank $9.6B, with declines in both goods exports and imports.

Monday, Dec 2, 2024

Tuesday, Dec 3, 2024

Wednesday, Dec 4 2024

Thursday, Dec 5, 2024

Friday, Dec 6, 2024

Canada’s economy expanded by 0.3% qoq in Q3, down from 0.5% qoq growth recorded in Q1 and Q2.

Household and government spending provided support to overall GDP, but their contributions were offset by slower non-farm inventory accumulation, reduced business capital investment, and a decline in exports.

On a per capita basis, GDP contracted by -0.4% qoq in Q3, marking the sixth consecutive quarterly decline.

Monthly GDP growth for September came in at a modest 0.1% mom, missing expectations of 0.3% mom.

Full Canada Q3 GDP release here.

• Will the NFP data corroborate bets of a Fed pause?
• Loonie traders await employment numbers as well
• Australia’s GDP to verify whether bets of May RBA cut are realistic
• Euro could take directions from ECB President Lagarde

NFP and ISM PMIs to shape Fed expectations

The US dollar took a breather this week, pulling back even after being temporarily boosted by US President-elect Donald Trump’s tariff threats on Canada, Mexico and China.

Perhaps traders decided to capitalize on their previous Trump-related long positions heading into the Thanksgiving Holidays and ahead of next week’s all-important data releases. Market pricing is far from suggesting that investors’ concerns about a Trump-led government are receding.

This is evident by Fed funds futures still pointing to a strong likelihood of a pause by the Fed at the turn of the year. Specifically, there is a 35% chance for policymakers to take the sidelines in December, with the probability of that happening in January rising to around 58%. What’s also interesting is that there is a decent 27% likelihood for the Committee to refrain from hitting the rate cut button at both gatherings.

With that in mind, next week, market participants are likely to pay extra attention to the ISM manufacturing and non-manufacturing PMI data for November, due out on Monday and Wednesday, but the highlight of the week is likely to be Friday’s Nonfarm payrolls for the same month.

With inflation proving somewhat hotter than expected in October, the prices charged subindices of the PMIs may be closely monitored for signs as to whether the stickiness rolled over into November. The employment indices will also be watched for early clues regarding the performance of the labor market ahead of Friday’s official jobs data.

Should the ISM PMIs corroborate the notion that the world’s largest economy continues to fare well, the probability for the Fed to take the sidelines at the turn of the year will increase, thereby refueling the dollar’s engines. However, whether a potential rally will evolve into a strong impulsive leg of the prevailing uptrend will most likely depend on Friday’s numbers. Following October’s 12k, which was the smallest gain since December 2020, nonfarm payrolls may need to return above 200k for investors to become more confident in the dollar uptrend.

The JOLTs job openings for October on Tuesday and the ADP employment report for November on Wednesday could also offer clues on how the US labor market has been performing.

Is a back-to-back 50bps cut off the table for the BoC?

At the same time with the US jobs data, Canada releases its own employment report for November. At its latest gathering, on October 23, the BoC cut interest rates by 50bps to support economic growth and keep inflation close to 2%, adding that if the economy evolves broadly inline with their forecasts, further reductions will be needed.

Investors were quick to pencil in a strong likelihood for a back-to-back double rate cut, but the hotter-than-expected CPI numbers for October made them somewhat change their mind. Currently there is only a 25% chance of such a bold move, with markets becoming more convinced that a quarter-point cut could be enough.

With that in mind, a strong report on Friday could further weigh on the chances of a double cut by the BoC and thereby support the loonie. Nonetheless, an upbeat employment report may not be enough for the currency to change orbit and begin a bullish trend. More threats by US president-elect Trump about tariffs on Canadian goods could result in more wounds for the currency.

Strong GDP could keep the RBA on hold for longer

From Australia, the GDP data for Q3 are coming out on Wednesday, during the Asian morning. The RBA is the only major central bank that has yet to press the rate cut button in this easing cycle, with market participants believing that the first 25bps reduction is likely to be delivered in May.

The latest monthly inflation data revealed that the weighted CPI held steady at 2.1% y/y, but the headline rate rose to 2.3% y/y from 2.1%. With the quarterly prints also pointing to weighted and trimmed mean rates for Q3 at 3.8% and 3.5% respectively, it may take time before this Bank starts considering lowering rates, and a strong GDP number for that quarter could prompt investors to push further back the timing of the first reduction.

This could prove positive for the aussie, but similarly to the Canadian dollar, it may be destined to feel the heat of Trump’s tariffs as the president-elect has pledged to hit China with even bigger charges than Canada.

Will ECB’s Lagarde agree that a 50bps cut may not be needed?

In the Euro area, although Germany’s preliminary inflation numbers for November came in below expectations, they still revealed some stickiness, with the headline rate rising to 2.2% y/y from 2.0%. The Eurozone’s headline rate also moved higher, to 2.3% y/y from 2.0%.

Combined with hawkish remarks by ECB member Isabel Schnabel who said that rate cuts should be gradual, this weighed on the probability of a 50bps reduction by the ECB at its upcoming meeting, despite the disappointing flash PMIs for the month. Currently the probability for the ECB proceeding with a double cut on December 12 stands at around 20%.

Having that in mind, next week, euro traders may lock their gaze on a speech by ECB President Lagarde on Wednesday, who will make an introductory statement before the Committee on Economic and Monetary policy Affairs (ECON) of the European Parliament. They may be eager to get more information about how the ECB is planning to move forward.

Geopolitics and political events dominated the agenda this week. On Monday evening, president-elect Donald Trump announced 25% tariffs on imported goods from Canada and Mexico, and an additional 10% tariff on China. This would bring the total China tariff to 35%. Mexico has already threatened to retaliate while Canadian Prime Minister Justin Trudeau said he was prepared to work with the US in "constructive ways". China is also expected to retaliate, and we could be in for a tit-for-tat escalation similar to what we saw in Trump's trade war. In theory at least, Trump could implement tariffs with an executive order on his first day in the office. In practice, the timing remains highly uncertain. Most likely, the tariffs will have to be linked to Trump's planned tax cuts, and such a complex legislative package would take time to get Congress approval.

Also in the geopolitical sphere, Israel and Hezbollah agreed on a ceasefire that entered into force on Wednesday. Israel could consider its mission in Lebanon accomplished, with most of Hezbollah leadership eliminated and much of its arsenal destroyed. While the truce in Lebanon is a sign of hope in a region plagued by conflicts, there is a long road to sustainable peace. We have written more about the recent events in our monthly Geopolitical Radar: The world prepares for Trump 2.0, 27 November.

Political risks are on the rise in France, and this has also been reflected by the widening of the German-French bond spread to its highest level since 2012. On Monday next week, the minority government must pass a social security budget, which could result in a no-confidence vote against the government, potentially leading to a collapse. Hence, uncertainty remains in French politics, and it remains unclear if the concessions from PM Barnier will be enough to satisfy the National Rally, whose support the government needs.

This week's main data releases were inflation reports from euro area and the US. In the euro area, inflation picked up pace in November but less than expected. Headline inflation rate increased to 2.3% from 2.0% from October, in line with expectations, but the core inflation was unchanged at 2.7% (exp. 2.8%). In the US, PCE headline inflation rose to 2.3% in October from 2.1% in September, as expected, while the core inflation accelerated to 2.8%, also in line with expectations. Overall, we conclude that the disinflationary process on both sides of the Atlantic remains well on track.

Heading into next week, already over the weekend we get Chinese PMIs for November. In the past two months, we have seen a decent increase in the official PMI manufacturing from NBS rising to 50.1 in October. Now, we expect to see a flat reading, reflecting somewhat better activity after the recent round of stimulus. We also look for a small rise in the Caixin PMI manufacturing (Monday) coming from 50.3 in October.

In the US, we will get the ISM manufacturing index on Monday, JOLTs data on Tuesday, ADP report on Wednesday, and non-farm payrolls report on Friday. Also, a bunch of Fed speakers will be on the wires before the quiet period begins on Saturday. In the euro area, the most important release will be the ECB-preferred wage data due on Friday. Also, retail sales data is due on Thurssday and we are keen to see if the rebound continued in October.

Full report in PDF.

• Yen strength continued to persist reinforced by an uptick seen in the leading Tokyo’s core-core inflation rate as it rose to 1.9% y/y in November.
• Japan’s overnight swap rates have indicated an increase in odds that BoJ may hike its short-term policy interest rate again in the upcoming 18-19 December meeting.
• Watch the 149.30 intermediate support (potential downside trigger) on the USD/JPY.

One of the supporting factors for the likely looming medium-term yen strength revival may be due to increasing demand for safe-haven currency macro theme play bets being structured in the FX market via the yen as more potential tariff threats may be drummed out by the incoming Trump administration.

Today, it is the USD/JPY turn to show yen strength as it tumbled to breach below the 150.00 psychology level and hit a six-week low of 149.80 at this time of the writing.

The primary fundamental factor that triggered the renewed weakness in the USD/JPY has been an uptick in the Tokyo inflation data for November as it is considered a leading indicator of Japan’s nationwide inflation price trends.

Tokyo’s inflationary trend has started to reverse up

Fig 1: Japan’s PPI, core-core CPI & Tokyo core-core CPI trends as of Nov 2024 (Source: TradingView, click to enlarge chart)

The Tokyo core-core inflation rate that stripped out food and energy components, a better gauge of demand-side inflation rose steadily for the second consecutive month to 1.9% y/y in November from a 1.8% increase in October (see Fig 1).

Also, its subcomponent services-sector prices in Tokyo rose 0.9% in November from a year earlier after a gain of 0.8% in October.

This latest set of inflationary data from Tokyo suggests a potential sign of broadening price pressure, and sustained wage gains that allowed firms to charge more for services, in turn increasing confidence that Japan is on the path of making steady progress to stay above Bank of Japan (BoJ)’s 2% inflation target. The last reading of the nationwide Japan core-core inflation rate (excluding fresh food and energy) rose to 2.3% y/y in October from 2.1% in September.

BoJ’s monetary policy meeting in December is now “live”

Fig 2: Japan overnight indexed swap rates medium-term trends as of 29 Nov 2024 (Source: MacroMicro, click to enlarge chart)

The BoJ ended its negative interest rates in March after eight years and raised its short-term policy interest rate by 15 basis points (bps) to 0.25% in July.

After the release of the latest upbeat Tokyo’s inflationary trends, market participants have now increased bets that BoJ may introduce another interest rate hike after its 18-19 December monetary policy as part of BoJ’s gradual normalization policy framework after it ended its decade-plus of ultra-accommodative monetary policy in March this year.

The spread of the 3-month and 6-month Japan overnight indexed swap rates have widened significantly since Tuesday, 19 November over the 1-month swap rate. Both the 3-month and 6-month swap rates rose to 0.38% and 0.44% respectively, above the 1-month swap rate at 0.31% as of Friday, 29 November (see Fig 2).

The widening of the 3-month and 6-month Japan overnight indexed swap rates over its 1-month counterpart is likely to put a ceiling on further US dollar strength against the yen at least in the short to medium term.

USD/JPY broke below its 50-day moving average with bearish momentum

Fig 3: USD/JPY medium-term & major trend phases as of 29 Nov 2024 (Source: TradingView, click to enlarge chart)

The price actions of the USD/JPY have sliced below its 50-day moving average today and recorded an accumulated intraday loss of 4.25% since its 15 November 2024 high of 156.75.

In addition, its daily RSI momentum indicator has staged a breakdown below a significant parallel ascending trendline support after it flashed out an earlier bearish divergence condition at the overbought region on 14 November (see Fig 3).

A break below the 149.30 intermediate support may trigger the start of a potential medium-term (multi-week) corrective decline sequence on the USD/JPY to expose the next medium-term supports at 144.80 and 140.25 in the first step.

On the other hand, a reintegration above the 154.70 key medium-term pivotal resistance invalidates the bearish scenario for the next medium-term resistance to come in at 158.35.

USDJPY fell to six-week low on Friday, in fresh acceleration lower after stronger than expected inflation rise in Tokyo in November, boosted expectations for Bank of Japan’s rate hike in the policy meeting next month.

Fresh bears cracked key supports at 150.18/00 (Fibo 38.2% of 139.57/156.74/psychological, reinforced by 55DMA), with weekly close below these level to boost negative signal for extension towards next strong support at 149.21 (top of rising and thickening daily Ichimoku cloud).

However, today’s dip to 149.52 and subsequent bounce back above 150 level, signals that bears face headwinds at this zone.

Prevailing tone on daily chart is bearish, supported by strengthening negative momentum, and attempts to form 5/200DMA death cross, but countered by support from rising daily cloud and oversold stochastic.

Watch today’s reaction at 150 support zone for fresh near-term direction signal, with bearish bias expected below 200DMA (151.98), but also be aware of predominantly bullish technical structure on weekly chart (despite the pair being on track for significant weekly loss, the first one after eight consecutive weeks of gains).

This situation may lead into two scenarios – failure at 150 zone and subsequent bounce that would generate initial signal of possible heathy correction, before larger bulls regain traction, or deeper correction of the rally of over two months.

Res: 150.45; 150.74; 151.28; 151.95.
Sup: 149.52; 149.21; 148.71; 148.16.