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• US President-elect Trump’s proposed policies may trigger a further upside movement on longer-term US Treasury yields.
• A break above the 4.49% on the US Treasury yield may see a further potential rally towards 5.20%.
• A further reduction of the 2-year and 10-year yield spread between the Australian government sovereign bonds and US Treasuries may put further downside pressure on the AUD/USD.

Among the developed nations’ central banks, the Australian central bank, RBA is the sole “lone ranger” (except Japan’s BoJ) that continued to defend its staunch “cautiously hawkish” guidance and kept its short-term policy interest rate unchanged at 4.35%, a 13-year high.

In the recent RBA monetary policy meeting that concluded on Tuesday, 5 November, RBA Governor Bullock reiterated that interest rates in Australia need to stay restrictive for the time being due to upside risks to services inflation.

Even though the labour market has softened, RBA does not see a massive sharp deterioration in underlying conditions. In addition, Australia’s core CPI has eased to 3.5% y/y in Q3 from its Q4 2022 peak print of 6.8%, but RBA’s latest forecast showed core inflation trend will likely only hit its 2-3% target by mid-to-late 2025.

Hence, market participants expect the RBA to only enact its first interest rate cut in either May or July next year, and based on the RBA Rate indicator as of 6 November that calculates a percentage probability of an RBA interest rate change based on the market-determined prices in the ASX 30-day interbank cash rate futures market suggests an implied interest rate cut of 47 basis points (bps) in total for 2025.

Relentless push-up in the 10-year US Treasury yield

Fig 1: Medium-term & major trends of 10-year US Treasury yield with yield spreads of AU sovereign bonds/US Treasuries

(Source: TradingView, click to enlarge chart)

US President-elect Trump’s proposed deep cut on the corporation tax rate from 21% to 15% is likely to further increase the US budget deficit. In addition, the proposed higher trade tariffs on Chinese and the rest of the world’s imports may also revive inflationary pressure in the US economy.

The net effect of Trump’s campaign trail proposed policies is higher longer-term US Treasury yields which the bond vigilantes have responded to in the past four weeks.

The start of the current US Federal Reserve interest rate cut cycle on 18 September saw a jumbo 50 basis points (bps) cut on the Fed funds rate. In contrast, the longer-term 10-year US Treasury yield traded higher and rallied by 88 bps from its 17 September low of 3.60% to print a recent high of 4.47% on US presidential election day, 5 November.

A bullish breakout with a daily close above 4.49% on the 10-year US Treasury yield may see further upside to revisit the 5% to 5.20% major resistance zone which in turn can potentially assert downside pressure on the 2-year and 10-year yield spreads between Australian government sovereign bonds and US Treasuries (see Fig 1).

A reduction in these yield spreads may trigger further downside pressure on the AUD/USD

AUD/USD at risk of revisiting 0.6400/6360

Fig 2: AUD/USD medium-term trend as of 8 Nov 2024 (Source: TradingView, click to enlarge chart)

The price actions of AUD/USD have continued to oscillate within a major complex sideways range configuration since its 13 October 2023 low of 0.6170.

After a test on the upper limit of the major range configuration at 0.6900 on 27 September, the AUD/USD started to decline toward the lower limit of the range, broke below its 50-day moving average, and traded below it since 14 October (see Fig 2).

Watch the 0.6720 key medium-term pivotal resistance. A break below the 0.6540 intermediate support may expose the medium-term pivotal support zone of 0.6400/6360 (also the major ascending trendline from the 13 October 2023 low).

On the other hand, a clearance above 0.6720 negates the bearish tone for a retest on the 0.6900 major resistance (also close to the long-term secular descending trendline from the 25 February 2021 high).

The Canadian dollar has steadied on Friday after a roller-coaster week. In the European session, USD/CAD is trading at 1.3889 at the time of writing, up 0.22% on the day.

Canada’s job growth expected to slow

With the tough battle against inflation largely won, the Bank of Canada has been a leader in the easing cycle among central banks, having cut rates three times this year. BoC policymakers are still keeping an eye on inflation but employment data is also in focus. The labor market has performed well despite high interest rates and a sluggish economy and the BoC needs the labor market to remain strong in order to ease the economy into a ‘soft landing’ and avoid a recession.

The September employment report was impressive as job growth jumped by 46.7 thousand, which was much higher than expectations. The October release is expected at 25 thousand and the unemployment rate is projected to creep up to 6.6% from 6.5%. If the forecasts prove accurate, it would point to a gradually weakening labor market, which would allow the BoC to continue cutting rates in modest increments of 25 basis points. The BoC holds its last rate meeting of the year on Dec. 11.

The Federal Reserve lowered the benchmark rate by 25-basis points on Wednesday. This is the second cut in the easing cycle after an oversized 50-bp chop in September. The move was widely expected and overshadowed by Donald Trump’s decisive and surprisingly easy win in the US election. The Fed plans to continue trimming rates but the size of the cuts will depend on the health of the economy, with employment and inflation data being the crucial factors which will determine the Fed’s rate path.

USD/CAD Technical

• USD/CAD is testing resistance at 1.3884. Above, there is resistance at 1.3925
• 1.3819 and 1.3778 are the next support levels

The Japanese yen has posted gains on Friday. In the European session, USD/JPY is trading at 152.38, down 0.36% on the day. The yen has taken traders on a roller-coaster ride this week, plunging 2% on Wednesday and rebounding on Thursday with a 1.1% gain.
Japan’s household spending declines 1.1%

Japan’s household spending fell by 1.1% y/y in September, following a 1.9% drop in August. This was better than the market estimate of -2.1%. Household spending has declined in 10 of the past 12 months, as consumer confidence fell in October and inflation is relatively high. On a monthly basis, household spending decreased 1.3%, after a strong 2% gain in August. This beat the market estimate of 0.7%.

The weak yen is also weighing on consumers, who are being squeezed as their purchasing power has fallen. The yen fell to three-month lows this week against the dollar and if the downswing continues, the Bank of Japan will be under pressure to respond with a rate hike.

Although consumers are holding tight on the purse strings, wages have been rising and the BoJ is hopeful that will translate into increased consumer spending and demand-driven inflation. Consumer spending makes up more than half of the economy and BoJ is unlikely to make further rate hikes until it sees stronger consumer spending. The markets don’t expect a rate hike until early 2025.

The Federal Reserve didn’t surprise anyone with a 25-basis point rate cut on Wednesday. This is the second cut in the easing cycle after an oversized 50-bp chop in September. The vote was unanimous and unlike the Bank of Japan, the Fed has been transparent and telegraphed its plan to cut rates ahead of the meeting. The Fed is expected to continue cutting rates in the coming meeting and will be keeping a close eye on inflation and employment reports.

USD/JPY Technical

• USD/JPY faces resistance at 153.44 and 154.17
• 152.16 and 151.43 are the next support levels

EURUSD weakened on Friday after recovery attempts from new multi-month low (1.0682), hit after Wednesday’s post-election 1.7% fall (the biggest daily loss since 19 Mar 2020), failed to clear daily Tenkan-sen (1.0809).

Formation of bull-trap pattern on daily chart adds to weak near term outlook as Wednesday’s massive bearish daily candle weighs heavily, technical studies remain in full bearish setup and converging weekly Tenkan/Kijun-sen are about to form bear-cross.

However, bears continue to face headwinds from a false break of Fibo support at 1.0745 (76.4% retracement of 1.0601/1.1214 ascend) with weekly close above this level to add to signals that bears are likely to consolidate before resuming the larger downtrend.

Long shadows on weekly candlestick contribute to scenario.

Near-term bias to remain with bears while daily Tenkan-sen caps, with potential extended upticks to be capped under pivotal 200DMA barrier (1.0868).

Res: 1.0835; 1.0848; 1.0869; 1.0907.
Sup: 1.0761; 1.0745; 1.0700; 1.0682.

The Dollar Index is in a sideways mode on Friday morning after Thursday’s drop almost fully reversed post-election rally on Wednesday.

Near-term action ranging above the base of thick hourly Ichimoku cloud and expected to remain constructive above trendline support (103.72) and 200DMA (103.64).

The dollar stabilizes after volatile conditions from release of US election results and Fed rate decision, keeping overall bullish structure and on track for the sixth consecutive bullish weekly close.

Profit taking from post-election rally pushed the price lower, but relatively hawkish Fed rate cut is expected to further underpin the US currency.

Fed cut rates by 25 basis points as widely expected and Chair Powell signaled in his post-policy meeting speech that the central bank is starting to assess the new economic landscape after Donald Trump enters the White House.

Trump’s program will be mainly focused on the economy and faster growth is likely to fuel inflation that will require a review of Fed’s current stance on monetary policy.

Initial projections signal that fewer rate cuts and earlier than expected end of policy easing cycle would be likely scenario when plans of new administration start to materialize which would be overall supportive for the dollar in the near future.

Technical picture remains bullish on daily chart, but loss of positive momentum, with long upper shadow on weekly candlestick, overbought conditions on weekly chart and likely failure to register weekly close above cracked pivotal Fibo barrier at 105.13 (38.2% retracement of 114.72/99.20 downtrend) warn that bulls may be running out of steam.

Prolonged consolidation above trendline / 200DMA supports is seen as ideal scenario, in which bulls will consolidate and regain traction for fresh push higher, with sustained break above 105.13/33 pivots (Fibo / new four-month peak) to focus targets at 105.78 (June 28 high), 106.36 (May 1) and 106.90 (50% retracement).

Alternative scenario sees risk of deeper correction on loss of key supports at 103.72/64 (trendline / 200DMA) and 103.24 (Nov 5 higher low / Fibo 38.2% of 99.84/105.33 rally).

Res: 104.54; 104.83; 105.33; 105.87.
Sup: 104.05; 103.72; 103.64; 103.24.

Market Picture

The cryptocurrency market is consolidating near the $2.5 trillion mark after pulling back slightly from the local peak. Judging by intraday performance, the market is undergoing a shakeout of positions as some players close positions related to the idea of a Republican victory. The market’s further momentum will depend on whether politicians continue to support crypto, which creates the risk of volatility.

Bitcoin is hovering around $75.7K, close to the highs. This stabilisation in the 3% range is helping to blow off steam for short-term speculators who were closing in on the idea of a Trump victory. The technical picture has changed a little: Bitcoin is close to the upper boundary of the upward channel, which raises the risk of a corrective pullback. At the same time, after rising above 72, the first cryptocurrency has broken through the upper boundary, suggesting further growth.

Solana is attempting to copy Bitcoin’s momentum this year, having reached the March highs. However, trading close to $200, it has yet to break through resistance. It is also still below the 2021 high of $260.

News Background

After updating its record in the wake of the US election, Glassnode believes that bitcoin can continue to grow thanks to fresh capital inflows. It has strengthened significantly since the beginning of September, suggesting a growing appetite for risk among investors.

According to CoinShares, Donald Trump’s administration is likely to create a more favourable environment for cryptocurrencies, including the passage of the Bitcoin Act. BTC could be approved as a strategic reserve asset, with the US government able to purchase up to 5% of the available issue.

Ethereum developers launched the first test network as part of the Pectra hardfork. The aim is to assess the impact of the EIP before the main network launches in the first half of 2025.

According to Lookonchain, the Ethereum Whale, which holds 398,891 ETH ($1.14 billion), has started selling assets after eight years of inactivity. On 7 November, it sold 13,400 ETH ($37.38m) against a backdrop of ETH rising to $2800.

• USDCAD posts new 25-month high but currently stands beneath it
• Stochastics and RSI show positive signs

USDCAD has been developing above the 20-day simple moving average (SMA) since the bounce off the 1.3815 support level and is trying to regain ground.

Daily oscillators suggest that the upside momentum is still in place, reflecting the pullback in the market. The RSI turned up after it reached the 50 level, while the stochastic posted a bullish crossover within its %K and %D lines.

If buyers maintain control and push the price above the more than two-year high of 1.3958, it could reach the peak of 1.3975 achieved in October 2022. Rising further, the market could rest near the next round number of 1.4100, registered in February 2016.

However, should sellers take charge, the first obstacle to the downside might be the 1.3815 support ahead of the 1.3745 barricade. If this support is violated, the focus would then shift to the 50-day SMA at 1.3690, which is ahead of the 200-day SMA, which is located near the 1.3650 support.

Summarizing, as long as the price remains above the 200-day SMA, the outlook remains bullish in the short term. A decisive break above the October 2022 peak of 1.3975 would switch the broader picture to positive as well. 

Short Term Elliott Wave View in EURGBP suggests that decline to 0.8295 on October 18, 2024 ended wave (1). Wave (2) corrective bounce is proposed complete at 0.8447 as the 1 hour chart below shows. Internal subdivision of wave (2) unfolded as a Flat Elliott Wave structure. Up from 10.18.2024 low, wave A ended at 0.8352 and wave B pullback ended at 0.8295. Wave C higher ended at 0.8447 which completed wave (2) in higher degree. Pair has turned lower in wave (3) with internal structure of an impulse.

Down from wave (2), wave (i) ended at 0.8366 and wave (ii) ended at 0.8418. Wave (iii) has resumed lower as an impulse. Down from wave (ii), wave i ended at 0.8388 and wave ii ended at 0.8412. Wave iii lower ended at 0.8414 and wave iv rally ended at 0.834. Last leg wave v lower ended at 0.8305 which completed wave (iii) in higher degree. Wave (iv) corrective rally ended at 0.833. Expect pair to extend lower to end wave v of ((i)). Then it should rally in wave ((ii)) to correct cycle from 11.1.2024 high before it resumes lower. Near term, as far as pivot at 0.8447 high stays intact, expect rally to fail in 3, 7, or 11 swing for further downside.

EURGBP 60 Minutes Elliott Wave Chart

EURGBP Elliott Wave Video

https://www.youtube.com/watch?v=r6x2q1AhrH8

Markets

The barrage of central bank meetings in Sweden, Norway, the Czech Republic and the UK ended with a decision in the US. The Fed delivered the expected 25 bps cut to 4.5-4.75%. The new statement featured little changes compared to September and guidance for future decisions, if any, was limited. Chair Powell in the presser said the way to a more neutral stance will be dictated by the health of the US economy and that the data currently do not suggest there’s “any need to be in a hurry to get there.” He added that as rates closed in on neutral, it may be appropriate to slow down the pace. With president-elect Trump on track to loosen the purse materially and add fuel to an already solid economy, the Fed may already be pretty close to that point. Powell said yesterday it was too soon to say how the Trump administration’s policies would reshape the outlook. But things may have gotten clearer by the December 18 meeting. Barring unexpected economic weakness, we wouldn’t be surprised to see the updated economic forecasts and Powell to lay the groundwork for a skip or pause the cycle early 2025. US interest rates dropped on a daily basis but that had little to do with the Fed decision. Yields simply gave back some of the post-election gains, easing between 6.3 (2-yr) and 12.1 (7-yr) bps, the belly of the curve outperforming the wings. Bunds underperformed Treasuries in anticipation of a new, willing-to-spend German government (already in January?) after the current one collapsed yesterday over the liberal democrat’s hard pass for lifting the debt brake. Yields recovered between 3.8 and 5.3 bps. Interest rate differentials favoured EUR/USD, lifting the pair back towards the 1.08 area. Sterling gained modestly to EUR/GBP 0.831. The Bank of England cut rates to 4.75% but governor Bailey was cautious about future cuts given the expansionary Labour budget. After a key four days that covered all corners of the world, the economic calendar shifts into lower gear ahead a long weekend for US (bond) markets. That paves the way for technical trading as markets look for a new balance in the run-up to, amongst others, next week’s US inflation numbers and retail sales. We do keep a close eye at the outcome of an important meeting in China that ends today. More supportive measures are expected to be announced.

News & Views

The Czech National Bank cut its key policy rate by 25 bps yesterday, to 4%, in a split decision. One out of seven members voted for leaving rates unchanged and one voted for a larger 50 bps rate cut. The Czech economy is recovering only slowly and is below its potential. GDP forecasts faced a downward revision compared with August: 1% for this year and 2.4% for 2025, from respectively 1.2% and 2.8%. Inflation is the central bank’s key worry though. The Bank board expects it to rise temporarily over the next few months (food prices) but core inflation remains elevated as well, especially in services. CPI forecasts faced an upward revision, from 2.2% to 2.5% this year and from 2% to 2.2% next year. It is expected to remain withing the 1%-3% tolerance band around the 2% inflation target but thus more elevated. Risks and uncertainties around the outlook are modestly inflationary overall. In this respect, the CNB says that it will approach future monetary policy easing with great caution and may pause or terminate the interest rate reduction process in the month ahead at levels that are still restrictive as rates approach neutral levels (3.5%). The Czech krone won ground after the hawkish cut with EUR/CZK dropping from the 25.40 support area to 25.25.

October’s KPMG and REC, UK report on jobs survey signaled further declines in both permanent and temporary placements during October. Rates of decline were the steepest since March, amid reports of reduced demand and hiring freezes at firms (partly in the run-up to the late October government Budget). Higher staff availability (20th consecutive monthly rise) amid a reduced number of vacancies was also seen. The increase in temps was notable in being the sharpest recorded by the survey since December 2020. “With many of the tax rises announced in last week’s Budget impacting businesses, the expectation from some chief execs is that this could further dampen hiring as companies grapple with absorbing any extra costs.” Whilst firms signaled willingness to pay higher salaries to suitable candidates, permanent salary growth softened in October to its lowest level since early 2021. REC CEO Carberry said that there’s little in the pay data of today’s report that suggests the BoE should step away from further cuts to interest rates, which will also boost business confidence.

The Federal Reserve (Fed) delivered the second rate cut of the year yesterday. Chair Jerome Powell said that the Fed doesn’t rule ‘out or in’ a rate cut in December, that the US economy is expanding solidly, that conditions in the labour market eased but the unemployment rate remains low, that inflation ‘made progress’ but not a ‘further progress’ – just progress – toward the committee’s 2% objective but remains elevated’, that the Trump policies won’t have an immediate impact on the US fundamentals as they don’t know how much time it will take the new Trump administration to implement them, and that he wouldn’t step down if Trump asked him to do so.

But the Fed has no choice but to dance to Trump’s tune, whether it likes it or not. That reality comes with the risk of higher-than-otherwise inflation and deserves careful attention.

For now, the probability of another 25bp cut in December is given 71% in the immediate aftermath of the US election and the Fed cut. The US 2-year yield retreated yesterday, following a Trump-led spike earlier this week. The 10-year yield also eased from an earlier spike to 4.33%. If US inflation doesn’t ease enough, and if the US economy remains robust and labour market remains in a good shape, the bond vigilantes, who think that the Fed is cutting too fast by too much, will send the yields higher. There are rumours of a potential spike in the 10-year yield to 5%. The latter would destroy the impact of rate cuts and weigh on sentiment.

Investors on a rosy cloud

The week saw the nest possible combination for US equity bulls. Trump has just won the presidential election and the Fed lowered the interest rates. The S&P500 hit another record high, as did Nasdaq 100, as did the Dow Jones. The rally in the small caps slowed on rising worries about the small companies’ ability to carry the burden of higher yields on their shoulders, but the mid caps could be an alternative for those who think that the prospects of higher yields on Trump makes the big caps look expensive at the current valuations.
Elsewhere

The US dollar bounced lower yesterday, as the Fed’s rate cut gave a good reason to the market to correct and consolidate the latest gains. The EURUSD rebounded but the upside remained capped near the 1.08 resistance, and Cable strengthened to flirt with the 1.30 on the back of a hawkish rate cut from the Bank of England (BoE), but gains were challenged by strong offers near the 1.30 psychological resistance.

This being said, the BoE is right to adopt a less dovish outlook given that the UK’s new budget – with extra spending to boost growth – will also boost inflation by half a percentage point according to the BoE. As such, Bailey – who had turned aggressive on rate cuts – didn’t remain long at that party. The BoE is now expected to keep lowering rates ‘gradually’. And that shift from ‘aggressive’ to ‘gradually’ easing outlook is supportive of the pound if of course the growth outlook doesn’t deteriorate significantly. Mid-1.30s look a reasonable target for the sterling bulls if the Fed insists on staying where it stands today.

But as Baily emphasized, the world has become a place with ‘very big geopolitical shocks’ and there are ‘very big uncertainties in the world economy and the world at large’. The latter should continue to help gold to defend its place in portfolios. The yellow metal saw support at the 50-DMA yesterday and should continue to be supported by haven flows and sustained central bank buying as a response, or preparation, to the new Trump era.

Over in China, the wait is long for investors who just want to see the Chinese authorities put a number on the amount of fiscal stimulus it will deploy to counter the Trump shock.

In energy, US crude was better bid this week, as news that OPEC would delay the production restrictions by at least a month and rumours that tensions in the Middle East could revive anytime were topped by the ‘hope’ that Trump would abandon the alternative energy plans altogether and put all of his weight behind the traditional energy sources. Presently, the barrel of US crude is testing the major 38.2% Fibonacci resistance on the summer selloff, near $72.85pb. A sustainable rise above this level requires encouraging fiscal boost from China. If not, the price rallies will remain interesting opportunities to sell the tops and keep the price of barrel close to the $70pb level.