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Sunset Market Commentary – Action Forex

Markets

A fairly thin eco calendar and blackout-periods for major central bankers made this morning’s Japanese moves the main talking point. Comments by deputy governor Himino and governor Ueda suggest a sense of urgency within the BoJ to normalize policy rates before the window of opportunity closes. November Tokyo inflation figures suggest a faster return to the 2% inflation target while markets on a global level are betting on H1 2024 pivot points in monetary policy. It kind of resembles efforts by the Swedish Riksbank in late 2018-2019 (when Fed rates already peaked at 2.5% coming from the zero border) to get rid of negative interest rates even as the growth momentum window was rapidly closing. In hindsight, the ECB missed out on that opportunity. Japanese officials seem to replace the question “should we end our negative interest rate policy” by “when should we end it and how far can we take it?” The timing of the Himino/Ueda comments is peculiar as well given that the Japanese yen finally got some breathing space over the past month as global core bond yields fell significantly. We always figured that a final swoon in JPY would eventually force the BoJ’s hand at gunpoint. Now all of sudden, it’s the BoJ December policy meeting which might have the biggest market impact instead of the Fed, ECB or BoE. A flopped 30-yr Japanese bond auction this morning proves that investors all of a sudden are on red alert. Japanese bond yields closed 6 bps (2-yr) to 11.9 bps (10-yr) higher. The Japanese yen rallied from 147.31 to currently 145, falling out of this year’s upward trend channel and testing the end of August/early September lows at 144.45/54. EUR/JPY declines from 158.60 to 156.30 with first important support looming around 155.

US weekly jobless claims served as distraction today between US JOLTS & non-manufacturing ISM on Tuesday, ADP employment change yesterday and finally payrolls tomorrow. Claims printed… bang in line with consensus (220k). The sharp uptrend in continuing claims however came to an unexpected and abrupt end, declining from 1925k (highest since end of November 2021) to 1861k (vs 1910k forecast). Markets ignored the release with US Treasuries and UK Gilts following the Japanese drift south (to a lesser extent) and Bunds trading more or less flat. EUR/USD is some technically insignificant ticks higher at 1.0780 as is EUR/GBP at 0.8575. Stock markets marginally lose ground.

The Belgian Debt Agency announced its 2024 borrowing requirements today. The gross requirement is almost €53bn, mainly compelling a net financing need of €21.5bn and redemptions of slightly over €29bn. The OLO funding need is estimated at €41bn, down from €44.82bn this year. News & Views

The Swiss franc briefly touched the strongest level since the Swiss National Bank ditched a currency cap in 2015. EUR/CHF hit an intraday low of 0.94, moving just south of the previous multiyear low seen in September 2022. It then pared losses in a technically inspired rebound back to 0.944. The Swiss franc is profiting from euro area bond yields having declined dramatically over the recent weeks on rising bets for quick ECB rate cuts, potentially as soon as March 2024. A first, full cut by the Swiss National Bank isn’t priced in before June 2024. This discrepancy comes even as Swiss inflation (1.4%) is considerably lower than in the euro area (2.4%). It are the SNB’s strong (hawkish) credentials that prevent markets from running ahead of themselves in ways similar to the Fed and ECB. The central bank’s credible readiness to intervene in FX markets serves as a backstop that markets aren’t willing to test.

World’s biggest job site Indeed said that the UK’s labour market remains tight, despite a fall in job postings over the course of 2023 and broader weakness in the economy. Indeed said that there are still 10% more job postings at the start of December than before the Covid-19 pandemic. While that has shrunk from the 48% at the start of December 2022, it still suggests ongoing resilience with the imbalance of labour demand and supply only gradually easing, the platform’s economist Jack Kennedy said. The labour market is a key variable in the Bank of England’s inflation judgement. Wage growth in particular is considered a critical component to the notoriously more sticky services inflation. Advertised salaries in the UK on the Indeed website were 7% higher in the three months to end October. This compares to 4.2% in the US and 3.8% in the euro area.

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