Macron caves to yellow vests, shifts EU narrative

The G-10 rundown

USD – the US dollar generally firm even as equities avoided a fresh meltdown late yesterday. GBPUSD likely a significant driver as it hit fresh lows. The USD may trade in choppy fashion until we get a look at the FOMC statement next week and Powell’s press conference – a dovish hike is the consensus scenario. USD bears will hope for an extremely dovish hike or no hike at all and a melt-up in risk assets.

EUR – Macron’s move to expand the budget is a game-changer for Europe – on the one hand, it eases the focus on Italy, but on the other raises the stakes for EU solidarity coming into 2019. Euro might have taken the news of fiscal stimulus more positively were it not for the aggravation of Brexit fears weighing so heavily on sterling and indirectly on the euro yesterday.

JPY – the yen having a difficult time of late firing consistently as a safe haven, and perhaps Japan’s latest growth data is behind some of the market’s reluctance to take a shine to the currency – nominal GDP in Q3 was down -0.7% on the previous quarter.

GBP – not sure I understand why the market saw the parliamentary vote cancellation as such a shock. It looked headed for an inevitable defeat anyway and there is no clarity on where the situation heads next, but GBPUSD likely to show far more beta to developments than EURGBP, where the euro has to take some collateral damage if sterling continues to weaken on fears of a no deal.

CHF – yesterday’s rally in the franc likely linked to the sterling weakness on latest Brexit developments, but if the fiscal stimulus bug spreads across the EU, the euro eventually finds support – that may have to await longer term developments once and if short-term Brexit hurdles are cleared.

AUD – AUD traders struggling for traction, but we have strong concerns on Aussie as the housing bubble unwinds on the risk that the RBA and the government have to respond along the lines of the US in 2008-09 if credit seizes up. CNY relative stability the only thing anchoring AUD here short term?

CAD – an easier path to downside on the weak housing theme as oil prices drop and there is more to unwind in policy expectation terms from the Bank of Canada.

NZD – the RBNZ’s Orr out speaking late today and have to wonder if he is beginning to get a bit uncomfortable with the kiwi’s relative strength. Given weak risk appetite backdrop, the strong kiwi of late sticks out like a sore thumb.

SEK – short Swedish rates holding up well, given the recent pressure on the currency as the market hanging in there in favouring a view to a Riksbank hike next Thursday. The inability to form a government after the election all the way back in September may be finally weighing at the margin as well.

NOK – a fresh downdraft in oil does NOK no favours. EURNOK rally puts the top of the range toward 9.75 back in focus. Norges Bank on Thurdsay will be happy to sit on its hands.

Upcoming Economic Calendar Highlights (all times GMT)

• 1000 – Germany Dec. ZEW Survey
• 1330 – US Nov. PPI
• 1915 – New Zealand RBNZ's Orr to Speak