• BOJ Governor Ueda said the chance of moving rates out of negative in 2024 is „not zero“
• Japan November Industrial production (preliminary) -0.9% m/m (expected -1.6%)
• China’s ’state planner‘ on measures to expand domestic demand, promote stable growth

AUD/USD
and NZD/USD rallied during morning Asia trade but have each shown
retracements. AUD/USD is almost back where it began while NZD/USD has
held a little higher. As with other major-traded forex rates, the
swings were not large.

USD/JPY
dropped to lows just under 141.20 and has retraced to just above
141.40 as I update.

The news flow for the session was negligible. On the data front, we had not as
bad as expected industrial output from Japan for November, and better
than expected retail sales.

This article was written by Eamonn Sheridan at www.forexlive.com.

His remarks didn’t contain any surprises:

• said he was in no hurry to unwind ultra-loose monetary policy
• cited the risk of inflation running well above 2% and accelerating was only small

Ueda is looking forward to the Bank’s regional branch managers‘ meeting in the middle of next month, saying it would deliver „quite a lot of information“. On the prospect of a policy shift at the January 22 – 23 meeting:

• „For now, I don’t think the chance of this happening is large“

More:

• desirable for wages to rise next year at around the same pace as this year „or somewhat faster“
• BOJ will be assessing to what extent firms pass on higher labour costs to services customers
• not quite convinced yet that Japan can foresee inflation sustainably achieving the BOJ’s 2% target
• the chance of moving short-term interest rates out of negative territory next year „was not zero“
• key factor would be whether wage hikes will broaden to smaller firms in 2024’s annual spring wage negotiations, but the BOJ could decide even before the smaller firms‘ wage talk outcome becomes available, if their profits turn out to be very strong

USD/JPY update:

This article was written by Eamonn Sheridan at www.forexlive.com.

I would say that the dovish and hawkish skew for the Fed is taking on less importance than usual in this current setting and will likely be the case as well for next year. As of late, policymakers tend to communicate in a more consistent manner in trying to cement their credibility in the fight against inflation.

The first half of next year will still involve that sort of thinking but even as rates are to move lower, we are likely to hear a more uniform message from the Fed. It’s all about guiding markets in the right direction now, so as to not afford any major screw ups in communication. That seems to be the way that policymakers these days prefer to play things out.

It seems like they are more worried about their image than really trying to stand out and mess with the status quo. But that’s a conversation for another time. For now, let’s take a look at the voting rotation for the FOMC going into next year.

Among the rotating members, it seems like we’re moving from a balance of one more hawkish member to one more dovish member instead. But at this stage as mentioned, it’s all about moving towards a more uniform communication. As such, I wouldn’t put too much emphasis on the dovish or hawkish skew in the voting intentions.

This article was written by Justin Low at www.forexlive.com.

And yet, that only really manifested in the final two months of the year. That after markets and the Fed needing added time to really be convinced of the disinflation process. But even so, the aggressive nature of the rate cuts pricing since November has put the dollar down by quite a fair bit after its strong positioning for the better part of 2023.

Here’s a snapshot of the major currencies performance against the dollar for the year:

The Japanese yen is of course the exception as it has been greeted with much disappointment amid any policy pivots but also after a surging run higher in bond yields right up until Q4 2023.

But as you can see, European currencies are the ones taking full advantage of the dollar’s retreat. And that comes despite the fact that markets are also seeing quicker rate cuts by the ECB and BOE heading into next year. The difference is that perhaps the disinflation narrative there isn’t as prevalent as in the US, making the conviction for Fed rate cuts that much stronger.

And that especially after the change in language by Fed chair Powell in the final FOMC meeting for the year and also from the dot plots projection.

So, will the run lower in the dollar, like what we have seen in the last two months, continue into the new year? And will that be the main story in trading for 2024?

If trading this year is anything to go by, it might not be as straightforward as that.

There’s still going to be a lot of moving parts to scrutinise, with the most important one being the inflation outlook. For now, the disinflation process looks to be going uninterrupted. And that is helping to spur on risk trades as well. In other words, it’s a complete reversal to the early stages of this year as traders now opt for a sell the dollar, buy everything else mood.

The next key thing to watch will be how the global economy fares. Currently, the fact that a soft landing is the likely scenario to beckoning is also helping to cushion the pessimistic hammer on risk assets. Indirectly, that’s a headwind for the dollar as such.

But if there are growing concerns that a soft landing may turn into something worse, that could help to turn things around for the dollar. That especially if the US continues to be the cleanest shirt among the dirty pile of laundry.

For now, it is vital to be aware that markets are treating as though this i.e. dollar demise, is going to be the main theme in trading next year. That is evident by the pricing in rates and central banks in the last few weeks, as well as the price action across asset classes. So, if there is going to be reason to run all of that back, the correction/retracement can be quite a forceful one in favour of the greenback.

That will be a key consideration for trading next year when thinking about the supposed imminent demise of the dollar.

This article was written by Justin Low at www.forexlive.com.

When Haruhiko Kuroda resigned from his post as Bank of Japan governor in April this year, he laid the groundwork for his successor, Kazuo Ueda, to try and make a change on the policy front. His departing words were that „Japan has made steady progress towards achieving its 2% inflation target“.

While those words are now commonplace, they were not for many years as the Japanese economy battled against deflation. And when Kuroda made such comments, it got markets excited into thinking that change is afoot at the Bank of Japan.

But as we have come to know about Ueda’s tenure so far, it has been nothing but disappointment for yen bulls in each and every important juncture this year. That saw USD/JPY rally all the way from 130 to 150, also helped out by soaring Treasury yields at the time.

It wasn’t only until the turn to November that saw the pair start to fall back alongside bond yields, as traders also start to build up anticipation and expectation for an imminent policy shift by the Bank of Japan in the near future.

Right now, Japanese officials have guided markets to the spring wage negotiations in March and April next year to be that key turning point. The question is, will they actually end up delivering on that? Or will Ueda & co. end up being overly cautious in slow rolling the pivot away from ultra easy monetary policy?

I want to say that they will ultimately push for a change but at the same time, their credibility in doing so is perhaps being put on the line in a race against time as well. So, it’s not going to be as straightforward as it looks.

That will make it extremely tricky to navigate the Japanese yen and for traders, there could be potential squeezes and unwinding in positions depending on how the Bank of Japan outlook develops.

For this year, it has been easy to stay long in yen pairs and USD/JPY in particular amid the positive carry. But for yen bulls, it is a painful exercise to hold such a heavy negative carry and to stick in such a position for an extended period. And until the Bank of Japan truly pivots from negative interest rates, it could end up still being the case for those optimistic on the yen currency in the early stages of next year.

It’s all about the timing as they say and what may really deliver a blow to yen bulls would be another disappointment by Japanese officials, even after a strong result from the spring wage negotiations.

I wouldn’t put it past the Bank of Japan to ultimately deliver a shift later on, even if they did not do so in March and April. But such a scenario will just add to the likely volatile and uncertainty that will surround the currency in just the first half of next year.

This article was written by Justin Low at www.forexlive.com.

• China’s November Industrial Profits rebound with 29.5% y/y Growth
• Goldman Sachs forecasting US inflation falling to low 2% y/y by US spring time
• Goldman Sachs‘ view on China for the year ahead is not confidence inspiring
• USD/JPY jumped after the BOJ December minutes showed no urgency on a pivot
• The BOJ December meeting summary is not suggestive of any urgent pivot
• Ex-Fed Dallas head Kaplan expects FOMC to lower rates soon, to avoid a flip side mistake
• US stocks off to a positive start for the trading week
• BOJ Gov Ueda said we’re not there yet, prospect of achieving price target not high enough
• U.S. Treasury sells 2-year notes at a high yield of 4.314%

USD/JPY
moved from 142.40 up to just above 142.80 after the Bank of Japan
published its ‘Summary’ of the December meeting. The“Summary
of Opinions“ serves as a record of the discussion and views of
the Policy Board members on economic, financial, and of course policy
issues. The full Minutes of the meeting will be published on January
26 but the briefer Summary today indicated the Bank is not pressing
ahead with removing YCC nor raising short term rates from their
negative level any time soon. The next policy meeting is January 22
and 23.

Elsewhere
across the majors we had minor moves only.

From China we had data on November industrial profits. These rose sharply in November from October, up almost 30% y/y. More in the bullet point above.

USD/JPY has since subsided back to where it started:

This article was written by Eamonn Sheridan at www.forexlive.com.

• +29.5% y/y for the month, up sharply from October’s +2.7% y/y and its fourth consecutive month of growth
• and -4.4% YTD y/y (i.e. January – November y/y), from January – October’s reading of -7.8% y/y

So, weaker profits over the first 11 months of this year compared with the same period in 2022, but the November alone month up nearly 30% is encouraging.

China is dealing with weakening demand with its stumbling recovery from lockdowns.

—

Industrial profit numbers cover firms with annual revenues
of at least 20 million yuan ($2.80 million) from their main
operations.

This article was written by Eamonn Sheridan at www.forexlive.com.

The last two months of the year have featured some aggressive moves by traders in pricing in rate cuts for major central banks going into next year. The narrative is one that says traders are convinced by the disinflation trend and that policymakers can start to lower rates as the battle is already won.

Whether or not that will be the case remains to be seen but markets are led by the data and so far, there is not much reason to turn the other cheek. So, what’s priced in now for major central banks that are leaning towards interest rate cuts next year?

• Federal Reserve: -156 bps (first -25 bps in March)
• European Central Bank: -161 bps (first -25 bps in April)
• Bank of England: -141 bps (first -25 bps in May)
• Swiss National Bank: -86 bps (first -25 bps in June)
• Bank of Canada: -120 bps (first -25 bps in April)
• Reserve Bank of Australia: -53 bps (first -25 bps in June)
• Reserve Bank of New Zealand: -93 bps (first -25 bps in May)

That is some rather heavy posturing, especially when it comes to the Fed, ECB, and BOE in particular.

It is important to understand what is priced in as per the above as that sets out the market expectations at the moment going into next year. And therein lies the risk of any potential correction/retracement in pricing if inflation data does not corroborate with what traders are seeing in the first few months of 2024.

This article was written by Justin Low at www.forexlive.com.

Year after year, it bears repeating that January is seasonally the best month for gold. It is just one of those things in markets and more often than not, that trend delivers as it should. But will it do so again this time around?

I touched on that two weeks ago here in relation to a bit of a technical setback in gold at the time. But since then, gold has rallied back to sit higher in December trading, recovering from around $1,975 to around $2,050 currently. However, the key resistance from the 2020 high at roughly $2,075 continues to hold on the daily, weekly and monthly charts, and that remains the critical level to watch heading into next year.

Normally, I’d like to think that gold can bank on this seasonal tailwind 9 times out of 10. But considering the technical situation above, it’s not necessarily a given that gold will be able to shine in January trading once more. That is because if gold is to advance further, it has to pass the test of breaking the key resistance level outlined above. And that means gold needs to push up to close at record levels.

The rally in gold since November also comes on the back of a softer dollar and sliding bond yields, with the latter being a key driver in particular. That comes as the rates market steps up pricing for central bank rate cuts for next year.

The question for gold now is, will traders front run those expectations further and manifest that in the form of a technical break in January? Or will such a break require validation from the rates market?

It’s certainly an interesting one and may act as one of the first few litmus tests in gauging the market’s appetite on the central bank outlook to kick start 2024 trading.

This article was written by Justin Low at www.forexlive.com.

The long-awaited pivot by the Fed finally came in the final FOMC meeting for the year. And that sets up the stage for other major central banks to also follow suit starting next year, unless you’re the Bank of Japan of course. 2023 has been a year dominated by the outlook for major central banks and 2024 will be no different in that regard.

The only thing now is that we’re no longer talking about rate hikes but rate cuts instead. Traders have over the last two months, moved to aggressively price in rate cuts for most major central banks and that sets the backdrop heading into the new year.

It will be a push and pull between the current market pricing and any central bank pushback in the months ahead. All that before the likelihood of central banks conforming to market expectations and then slowly guiding rates back lower, as the disinflation process looks to gather pace in the year ahead.

Given such a predicament, the bond markets i.e. rates will continue to be a pivotal spot to watch – just as it had been this year. The real debate now in Q1 2024, is whether or not traders have it right to price in rate cuts as early as March to May for the likes of the Fed, ECB, and BOE in particular.

And if not, will that stem from a pushback from policymakers or more stubborn inflation data? And how much of a reversal or squeeze will we see to the recent sell the dollar, buy everything else move in markets?

On the flip side, if central banks start agreeing to traders‘ pricing, is there room for a further extension to the recent moves? Plenty of questions but only time will tell.

This article was written by Justin Low at www.forexlive.com.