Fall of French Government Does Not Roil the Markets and a BOJ Dove did not Rule out Rate Hike this Month

Overview: The US dollar is mostly softer today. The only G10 currency that has not gained on it today is the Swedish krona, which is nursing minor losses. Still, the tone is one of consolidation and this may persist through the North American session, ahead of tomorrow US employment report. The median forecast in Bloomberg's survey has crept up to 215k. Most emerging market currencies have also gained on  greenback, but the South Korean won. The failure of the French government to survive the confidence vote yesterday has not unsettled the markets. The euro is trading near a three-day high and the French 10-year premium over Germany has narrowed for the third consecutive session. 

Equities were mixed in the Asia Pacific region. China, Hong Kong, and South Korea, among the large bourses fell. Europe's Stoxx 600 is up for the sixth consecutive session, the longest streak since May. US index futures are nursing small losses. Benchmark 10-year yields are mixed in Europe, but peripheral-core premiums are narrower. The 10-year US Treasury yield is up a couple of basis points to poke above 4.20%. This is also the 200-day moving average. Gold continues to trade quietly and is trading inside yesterday's range (~$2632.50-$2657.20). January WTI is also trading quietly within the well-worn range, ahead of the OPEC+ meeting outcome. The most likely result is another delay in the planned output boost until April. 

Asia Pacific

The Bank of Japan is committed to normalizing monetary policy, but after the turmoil in late July, it treads carefully. Encouraged by the firmer (Tokyo) CPI and better retail sales and industrial production figures, the swaps market had nearly 17 bp increase discounted for this month's meeting. This was thrown into doubt yesterday in response to news that the head of the main opposition in an alleged personal scandal stepped down, at least temporarily. Earlier today, Nakamura, a dove at the BOJ, did not rule out the possibility of a rate hike this month. The swaps market had slightly less than eight basis points discounted at the close yesterday and about 8.5 bp now. Australia, which disappointed yesterday with 0.3% growth in Q3, but reported a sharp 0.8% rise in household spending in October, the most since January and more than the overall gain in the February through September. The RBA meets next week and may offer more color. The futures market is almost 75 bp of rate cuts next year, the most since October 21. Separately, Australia reported a wider October trade surplus (A$5.9 bln vs. A$4.5 bln). Goods exports and imports snapped a three-month slide. 

The dollar peaked against the in early North American trading yesterday near JPY151.25. It was unable to sustain the upside momentum as US Treasuries turned low before the downward revision to the US services and composite PMI and the mostly softer service PMI. The greenback was sold to JPY150. However, our bullish case for the dollar is driven by expectation for a solid jobs report tomorrow and another rise in headline CPI. It is consolidating today (~JPY149.65-JPY150.80) within yesterday's range. US rates are firmer and if the range is to be extended today, the upside looks more likely. The Australian dollar recovered from yesterday's session low near $0.6400 set early in the North American session. It reached around $0.6440 before stalling. It is trading quietly today (~$0.6420-$0.6455). The RBA meets the first thing next Tuesday. Given the hawkish rhetoric from Governor Bullock and today's data, some short covering ahead of the meeting seems a reasonable expectation. After setting a new high for the year on Tuesday near CNH7.3150, the greenback's gains were pared Wednesday, arguably helped by the recovery of the Japanese yen and pullback in US Treasury yields. The dollar's session lows were recorded near CNH7.2675 before European market shut for the day. The greenback is softer today but holding above yesterday's low. Initial chart support is seen around CNH7.25-CNH7.26. The PBOC set the dollar's reference rate at CNH7.1879 (CNH7.1934 yesterday).

Europe

The Barnier government was unable to survive the confidence vote. Back to the drawing board, but without an election until at least next July. The ball is in Macon's court. He could name a new prime minister. Still, one take away is that there is likely to be less fiscal consolidation next year. The French premium over Germany remains elevated above 80 bp but it has stabilized in recent days, ahead of yesterday's confidence vote. Indeed, the French premium has narrowed for six of the past seven sessions, and near 80 bp, it is the least in two weeks. The German government faces its own confidence vote in the middle of December. It looks doomed and sets the stage for a February election. Separately, the eurozone reported that aggregate retail sales fell by 0.5% in October, reversing in full September's increase. Recall, German retail sales fell by 1.5% (-0.5% was the median forecast in Bloomberg's survey) and the broader French measure of household consumption also disappointed with a 0.4% decline. It was expected to have been flat. Spain retail sales were flat, and Italy's figures are due tomorrow. Also, after surging a revised 7.2% in September (initially 4.2%), German factory orders fell 1.5% in October. The median forecast in Bloomberg's survey was for a 2% contraction. 

The euro traded with a firmer bias yesterday despite the French drama. It reached nearly $1.0545. It traded on both sides of Tuesday's range settled within it, neutralizing the technical significance. It is trading with a firmer bias today. The 20-day moving average is near $1.0565, and the euro has not closed above it since the US election. And even then, $1.06 has proven to be a firm cap. Sterling posted an outside up day, as well, but it closed marginally above Tuesday's high. As we anticipated yesterday, the five-day moving average has crossed above the 20-day moving average for the first time in two months, which is understood as a constructive signal for momentum traders. The recent highs were set near $1.2750 and so far, today's high is about $1.2740. A loss of $1.27 now would be disappointing. 

America

The US Census Bureau estimated that the US goods deficit narrowed by $9.6 bln in October to $99.1 bln. Through September, the goods balance has averaged $97 bln this year after nearly $89 bln in the first nine months of last year. The overall trade balance was smaller since the US runs a chronic surplus in services. The overall trade deficit averaged $73.4 bln this year. The October shortfall to be reported today is likely near the year's average. Given how tight the US election appeared before the fact, it may be too early to expect to see the front-running of the threatened tariffs, but we would be on the lookout for such behavior, especially given the anecdotes from businesses. November Challenger job cuts, and weekly jobless claims (for well after the survey week for tomorrow's jobs report) will see little attention. Canada reports its October goods trade balance. It has been in deficit since March. The average shortfall this year (~C$633 mln) is slightly larger than the C$445 mln average in the first nine months of 2023. Last year, Canada recorded a trade surplus with the US of a little more than C$38 bln.

The US dollar traded in a tight range against the Canadian dollar yesterday, mostly between CAD1.4055 and CAD1.4080. The services and composite PMI rose, and at 51.5 the composite PMI is the highest since May 2022. On the other hand, Q3 productivity disappointed, falling by 0.4%, which reflects a productivity slowdown greater than in H1 23. Another quiet session is likely today, ahead of tomorrow's job reports. The swaps market has about a 65% chance of another half-point cut next week, up from a little less than 55% at the end of last week and yesterday. The CAD1.4050 area offers nearby support and if that holds, as we expect, the greenback can recover toward the week's high set near CAD1.4090 om Monday. The greenback continues to gently ease against the Mexican peso. Today's is the third consecutive session of lower lows and lower higher. It set a new low for the week today near MXN20.2455. Shortly before Trump's tariff threat to Mexico (and Canada and China) last week, the US dollar was near MXN20.30. A break of support near MXN20.20 could signal a test on MXN20.00, which the US dollar has not traded below since November 8, the day after the Fed delivered a quarter-point cut. 

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