Welcome to the new month, same as the old month.
The mood was to buy everything and sell oil, same as it was for all of November. It started out as a quiet one and a good Canadian jobs report moved the loonie into the poll position with it only up 30 pips on the day. From there though, a softer US ISM manufacturing report helped to kick off a wave of USD selling, particularly in USD/JPY.
In addition, stocks began to rip. Powell spoke similarly to Daly and Williams yesterday, which was mildly hawkish but in time the market ignored it and priced in even more rate cuts next year. Fed funds futures are now at 133 bps next year and 70% for the first one in March. That’s aggressive to say the least.
But the bigger picture theme is that we’re going back to the world of low rates and low inflation, not some kind of sticky, 1970s redux. That’s a major change and it’s what is driving everything.
Adding to that was another slump in oil, most of which came after Baker Hughes data showed the US adding more rigs. There’s a creeping feeling that we’re headed for another battle for market share because OPEC isn’t going to cut production again. That could be a big deflationary impulse, at least initially.
The euro didn’t benefit from the USD selling because inflation numbers in Europe are cratering, along with yields. The euro was particularly soft into the London fix, which points to flows and it staged a 50 pips recovery later to finish almost flat but still at the bottom of the pile beside the US dollar.
AUD is going to be one to watch in the year ahead. It was tops today and the housing market there just hasn’t cracked. That could keep the rate hiking cycle going longer but note that Chinese ETF FXI also hit at 52-week low today so maybe that’s an upside risk? Sentiment about China surely couldn’t get much worse.
Have a great weekend.