IC Markets Asia Fundamental Forecast | 26 December 2023
What happened in the US session?
With both headline and core PCE Price Index readings continuing to ease steadily over the last few months, November’s print pointed to another round of ‘softer’ data as the headline reading eased from 2.9% YoY to 2.6% while the core slowed from 3.4% YoY to 3.2% YoY. This continued moderation of various inflation data points in the US provides further impetus to the Federal reserve to perhaps adopt an even more dovish outlook with regards to monetary policy.
Meanwhile, the final findings on consumer sentiment by the University of Michigan confirmed the 14% MoM increase as the Current Economic Conditions and the Index of Consumer Expectations both soared for the month of December. Combined with inflation expectations falling from 4.1% YoY to 3.1%, consumer confidence has seen a renewed improvement in overall sentiment.
The dollar index (DXY) hit a low of 101.45 before closing out the week at 101.71. The dollar remains under significant downward pressure as the final trading week of the year commences.
What does it mean for the Asia Session?
With less than a handful of markets reopening after the long Christmas holiday weekend, trading volume and average daily range for many currency pairs can be expected to be fairly subdued, especially with many markets remaining closed for Boxing Day today. The DXY gapped slightly lower at this morning’s open to trade around 101.65 and looks set to drift downwards.
The Dollar Index (DXY)
Key news events today
No major news events.
What can we expect from DXY today?
The DXY has declined for five out of the last six weeks, losing nearly 4.2% or shedding 410 pips in the process. As US inflation continues to slide lower on an annualized basis and with market expectations of a dovish Federal Reserve gaining traction, the demand for the dollar has fallen off a cliff and the DXY is likely to drift lower today.
Central Bank Notes:
- The Federal Funds Rate target range remained unchanged at 5.25% to 5.50% for the third meeting in a row.
- The Committee seeks to achieve maximum employment and inflation at the rate of 2.0% over the longer run.
- The Committee will continue to assess additional information and its implications for monetary policy.
- In determining the extent of any additional policy firming that may be appropriate to return inflation to 2.0% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
- In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.
- Next meeting runs from 30 to 31 January 2024.
Next 24 Hours Bias
Weak Bearish
Gold (XAU)
Key news events today
No major news events.
What can we expect from Gold today?
Spot gold prices hit $2,070/oz last Friday as falling PCE inflation data in the US provided the necessary tailwind for this precious metal. Although prices retreated to close out the week at $2,053/oz, gold prices are expected to remain elevated as demand for the dollar heads south.
Next 24 Hours Bias
Medium Bullish
The Australian Dollar (AUD)
Key news events today
Boxing Day Holiday
What can we expect from AUD today?
The Aussie hit a high of 0.6826 last Friday, a level last touched at the end of July. This currency has gained almost 6.5% or 450 pips versus the dollar over the past seven weeks and is likely to remain elevated as we enter the final trading week of 2023.
Central Bank Notes:
- The RBA kept the cash rate target unchanged at 4.35%, marking the fifth pause out of the last six board meetings.
- Inflation in Australia has passed its peak but is still too high and the progress in bringing inflation back to the target range of 2% to 3% was looking slower than earlier forecast.
- Any further tightening of monetary policy to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.
- Next meeting is on 6 February 2024.
Next 24 Hours Bias
Medium Bullish
The Kiwi Dollar (NZD)
Key news events today
Boxing Day Holiday
What can we expect from NZD today?
The Kiwi hit a high of 0.6318 last Friday, a level last seen since mid-July. This currency has gained nearly 8% or 490 pips versus the dollar over the past eight weeks and is likely to remain elevated as we enter the final trading week of 2023.
Central Bank Notes:
- The Monetary Policy Committee kept the OCR unchanged at 5.50% for the fourth meeting in a row.
- The Committee is confident that the current level of the OCR is restricting demand. However, ongoing excess demand and inflationary pressures are of concern, given the elevated level of core inflation.
- If inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further.
- The Committee agreed that interest rates will need to remain at a restrictive level for a sustained period of time, so that consumer price inflation returns to target and to support maximum sustainable employment.
- Next meeting is on 28 February 2024.
Next 24 Hours Bias
Strong Bullish
The Japanese Yen (JPY)
Key news events today
BoJ CPI (5:00 am GMT)
What can we expect from JPY today?
When looking at the various economic data points, inflation Japan has remained relatively stable for most parts of 2023. The Bank of Japan (BoJ) will release its core CPI reading for the month of November where the estimate of 3.0% YoY indicates an unchanged figure from the previous month. A weaker-than-expected print could provide a tailwind for USD/JPY after dropping as low as 141.87 last week.
Central Bank Notes:
- The Bank will continue with QQE with Yield Curve Control, aiming to achieve the price stability target of 2.0%, as long as it is necessary for maintaining that target in a stable manner.
- The Bank of Japan decided on the following measures:
- Yield curve control: Negative interest rate of -0.1% on policy-rate balances and purchase of Japanese government bonds to keep 10-year JGB yields at around 0% while regarding the upper bound of 1.0% for 10-year JGB yields as a reference in its market operations.
- Inflation expectations have risen moderately with underlying CPI inflation likely to increase gradually towards achieving the price stability target, as the output gap turns positive and as medium- to long-term inflation expectations and wage growth rise.
- Japan’s economy is likely to continue recovering moderately for the time being, supported by factors such as the materialization of pent-up demand, although it is expected to be under downward pressure stemming from a slowdown in the pace of recovery in overseas economies.
- Next meeting is on 23 January 2024.
Next 24 Hours Bias
Weak Bearish
The Euro (EUR)
Key news events today
Boxing Day Holiday
What can we expect from EUR today?
The Euro hit a high of 1.1041 last week, a level last seen since end-July – this currency has gained almost 4.2% or 450 pips over the past eight weeks. Although the Euro pulled back slightly last Friday, it is likely to remain elevated as the final trading week of 2023 gets underway.
Central Bank Notes:
- The ECB kept the three key interest rates unchanged for a second consecutive meeting, keeping the main refinancing rate on hold at 4.50%.
- While inflation has dropped in recent months, it is likely to pick up again temporarily in the near term.
- Underlying inflation has eased further but domestic price pressures remain elevated, primarily owing to strong growth in unit labour costs.
- The past interest rate increases continue to be transmitted forcefully to the economy as tighter financing conditions are dampening demand, and this is helping to push down inflation.
- The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.
- Next meeting is on 25 January 2024.
Next 24 Hours Bias
Weak Bullish
The Swiss Franc (CHF)
Key news events today
St. Stephen’s Day Holiday
What can we expect from CHF today?
After falling under the 0.8600-threshold last week, USD/CHF remains under heavy selling pressure. This currency pair hit a low of 0.8515 last Friday and is expected to drift lower today.
Central Bank Notes:
- The SNB kept the policy rate unchanged at 1.75% for a second consecutive meeting in December.
- The inflation forecast puts average annual inflation at 2.1% for 2023, 1.9% for
2024 and 1.6% for 2025.
- GDP growth is likely to be weak in the coming quarters; subdued demand from abroad and the tighter financing conditions are having a dampening effect.
- Switzerland’s GDP is likely to grow by around 1% this year. For 2024, the SNB currently expects growth of between 0.5% and 1%.
- Next meeting is on 21 March 2024.
Next 24 Hours Bias
Weak Bearish
The Pound (GBP)
Key news events today
Boxing Day Holiday
What can we expect from GBP today?
The Pound hit a high of 1.2760 last Wednesday before ranging between 1.2620 and 1.2750 for the remainder of last week. This currency has gained significantly versus the dollar recently but it has been more volatile than the other major currency pairs. Despite the general dollar weakness, the Pound could continue to slide lower today.
Central Bank Notes:
- The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 6-to-3 to maintain its Official Bank Rate at 5.25%.
- Three members preferred to increase the Bank Rate by 0.25 percentage points to 5.5%.
- CPI inflation remains well above the 2% target, with twelve-month CPI inflation falling sharply from 6.7% in September to 4.6% in October while services price inflation declined to 6.6%.
- The decline in CPI inflation over recent months could largely be attributed to falls in energy, food, and core goods price inflation, as external cost pressures had continued to abate. Services price inflation had remained elevated, however.
- The mean projection for CPI inflation is 2.2% and 1.9% at the two- and three-year horizons respectively.
- Next meeting is on 1 February 2024.
Next 24 Hours Bias
Weak Bullish
The Canadian Dollar (CAD)
Key news events today
Boxing Day Holiday
What can we expect from CAD today?
The Loonie has gained significantly over the dollar for the last few weeks, sending USD/CAD crashing below the 1.3300-threshold. This currency pair hit a low of 1.3215 before closing at 1.3261 last Friday. Overhead pressures remain for USD/CAD and it is likely to drift lower today.
Central Bank Notes:
- The Bank of Canada held its target for the overnight rate at 5.0% for the third meeting in a row while continuing its policy of quantitative tightening.
- Canada’s economy stalled through the middle quarters of 2023 with real GDP contracting at a rate of 1.1% in the third quarter, following a growth of 1.4% in the second quarter.
- The slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices, leading to the easing of CPI inflation to 3.1% YoY in October.
- The Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed and would also like to see further and sustained easing in core inflation.
- Next meeting is on 24 January 2024.
Next 24 Hours Bias
Weak Bearish
Oil
Key news events today
No major news events.
What can we expect from Oil today?
Crude oil prices made its largest gain since early October as it rose nearly 3% last week. WTI oil breached the $75 per barrel mark as drone attacks in the Red Sea provided a tailwind for prices; it was trading around $73.60 as Asian markets came online and is likely to remain elevated today.
Next 24 Hours Bias
Weak Bullish
