Head of FX Strategy
Summary: Dollar continues to extend its downtrend as market’s baseline expectation remains a soft landing. While bearish dollar picture could remain intact as seasonality and peak rates underpin, but the move is looking stretched and faces tests from month-end flows, OPEC meeting outcome or China economic data this week. RBNZ meeting tomorrow will be key for NZD to extend its rally, as Saxo clients generally position on the long side in NZDUSD and crosses. XAUUSD has come up on top in Saxo’s intraday FX dashboard as Gold rally catches momentum.
The dollar extended its decline this week, with the DXY index now down over 3% month-to-date. Markets continue to expect the Fed rate hike cycle to have ended, but without a recession for now. This soft-landing expectation has pushed the markets towards the centre of the USD smile where economy is neither too hot not too cold, and the USD trades lower as market participants flock to riskier assets. Seasonality also adds downside to the dollar – going into the end of the year. The table below shows that dollar has fallen by an average of 1.5% in December over the last six years.
From a data perspective, focus this week is on PCE data, Fed’s preferred inflation gauge that will continue to reaffirm the disinflation rhetoric. Consensus is looking for October PCE to slow to 0.1% MoM from 0.4% previously. For core as well, PCE is expected to cool to 0.2% MoM or 3.5% YoY – that falls below the Fed’s year-end target of 3.7%. This should broadly continue to be dollar negative, as the bar for an upside surprise is large. If actual numbers come in below expectations, risks of dovish re-pricing remain and that could make DXY index test key support below 103.
Fed’s Beige Book will likely highlight the case for a slowing economy, but nothing too spark more aggressive rate cut pricing for next year. However, four factors need to be on watch for any reversal in dollar to happen:
This could suggest that the dollar downside remains for the end of the year, but not without risks. Overall, dollar will likely remain range-bound for now, until sharper US economic downturn or clearly dovish Fed commentary comes out. Watch for support at 103, break of which could expose 61.8% fibo retracement at 102.50.
Procyclical currencies have been strong in the current risk-on environment. NZDUSD rallied above the 200DMA and the psychological 0.61 barrier this week, but the rally cooled today with the RBNZ rate decision coming due tomorrow.
New Zealand Q2 CPI at 5.5% remains well above RBNZ’s 1-3% target range but inflation expectation has eased. That gives room to RBNZ to continue to stay on hold, keeping policy rate unchanged at 5.5%. However, the Bank will need to maintain the optionality for further rate increase to push NZD higher in a new trading range. If RBNZ stays dovish, we could see NZDUSD reverse back lower towards the 38.2% fibo retracement level at 0.6018. A dovish outcome could also bring AUDNZD back closer to 1.08 after RBA Governor Bullock stuck a hawkish tone today.
Saxo’s intraday positioning for Monday (27/11) saw over a 1,000 trades in NZDUSD with 56% on the long side. NZDJPY saw a 62% long positioning while GBPNZD was 48% long.
Our commodity strategist Ole Hansen has been talking about the potential for a Santa rally in Gold and Silver. We also hosted a webinar today on the drivers of Gold and instruments to trade it for our institutional clients. Turns out, spot Gold was the highest traded FX instrument on the Saxo platform across offices on Monday. Fed pivot and a weaker dollar have been key drivers for the rally in Gold this month, and the precious metal has cleared key $2010 level to rise to six-month highs. Focus is now on $2,070, highs seen in 2022 and early 2023, and next catalyst will likely be a firmer outlook for Fed rate cuts which can boost ETF holdings.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
