German factory orders surprise to the upside

Overview: The US Dollar is a little softer today but mostly consolidating yesterday's moves against the G10 currencies. The Australian dollar leads the way and reached its best level since September 18. The market, though, has shrugged off surprising data:  a surge in German factory orders and a disappointing drop in household spending in Japan. Most emerging market currencies are firmer. As widely expected, the Reserve Bank of India cut its repo rate by 25 bp to 5.25% and signaled there was room for more cuts. The PBOC lifted the dollar's reference rate slightly, but it has fallen on a weekly basis since the end of September, with one exception. 

Outside of Japan, where the major indices fell by 1%, the large equity markets are higher today. In the Asia Pacific region, Shenzhen and the index of mainland shares that trade in Hong Kong led the regional move with 1.25%-1.80% gains. Europe's Stoxx 600 is up about 0.25%. If the gains are sustained, it would be the ninth advance in 10 sessions. S&P and Nasdaq futures are up 0.2%-0.4%. The European bond market is quiet with most yields slightly firmer. On the week, the 10-year Gilt yield is off about 4 bp, while German's yield is up almost three. The US 10-year Treasury yield is firm at 4.10%, about two basis points higher than a week ago. Gold continues this weeklong consolidation. In the spot market is settled at $4240 last week and is near $4223 now. January WTI is near the upper end of the $58-$60 range that has confined priced this week. 

USD: The Dollar Index made a marginal new low since late October yesterday, a little below 98.80, the 38.2% retracement of the rally since September 17 (Fed Day). The next retracement (50%) is around 98.30. However, the downside momentum has eased and DXY rose yesterday for the first time in nine sessions. It is trading inside yesterday's range so far today. The market is confident that the Federal Reserve will cut rates next week and knows that the dollar rallied after the September and October Fed cuts. Short-term participants appear to be turning cautious. Today' September personal income, spending, and deflators are too dated to be important for policymakers or investors. The median in Bloomberg's survey sees the headline deflator edging up to 2.8% from 2.7% in August. If accurate, it will be a new high for the year and match the highest level since last year's high of 2.9% in April. It was at 2.6% last November. The core rate may moderate slightly (2.8% vs. 2.9%) for the first time in five months. The futures market is discounting about a 60% chance of a cut in Q1 26. 

EURO: Yesterday, the euro recorded a marginal new high since October 17, slightly above $1.1680. Still, it stalled and recorded its first daily loss since November 21. The $1.1695 level corresponds to the (50%) retracement of the losses since the year's high was recorded near $1.1920 on September 20. The euro held yesterday's lows but has been unable to regain a foothold above $1.1670 despite the strong German factory orders. The 1.5% jump compares with median forecasts in Bloomberg's survey for 0.3% gains. It follows a 2% surge in September. It was the first back-to-back increase since March-April. The Bundesbank reported that large orders, and especially the 87% jump in orders for transport equipment (aircraft, ships, trains, and military vehicles), were behind the strength. Industrial production figures will be reported on Monday. It jumped by 1.3% in September, and large monthly gains are most often followed by a pullback. Lastly, note that there is a key vote in Germany's parliament shortly over the government's pension bill. 

CNY: The dollar recorded the low for the year on Wednesday near CNH7.0.540. It briefly traded above CNH7.07 during the European afternoon/North American morning yesterday. The dollar was firmer against most of the G10 currencies yesterday, while among emerging market currencies were more mixed. The dollar is consolidating against the offshore yuan today between CNH7.0630 and CNH7.0720. The PBOC set the dollar's reference rate slightly higher today (CNY7.0749) after fixing it at a new low since October 2024 yesterday (CNY7.0733). The greenback rose about 0.1% against the onshore yuan yesterday, its largest single-day rise since November 17. Data highlights next week include November trade (yes, surplus likely to exceed $100 bln for the first time since August. Inflation measures are due on December 10, several hours before the FOMC decision. The median forecast in Bloomberg's survey is for the CPI to rise 0.7% year-over-year. It would be the most this year match last year's high.

JPY: The dollar fell to JPY154.35 today, the lowest level since November 14. The daily momentum indicators have turned lower, and the five-day moving moved below the 20-day moving average this week for the first time in two months. The greenback recovered to back above JPY155.00 in the European morning. Note that there are nearly $2 bln in options at JPY155 that expire today. The dollar remains below the 20-day moving average (~JPY155.65). Still, the yen has been resilient to news of a dramatic 3.0% year-over-year drop in October household spending. The median forecast in Bloomberg's survey anticipated a 1.0% gain. The decline was led by a pullback in spending on transportation and housing. In terms of GDP, consumption rose 0.6% in Q3 and is expected to match that in Q4. Despite the poor consumption data to start Q4, the swaps market remains convinced of a BOJ rate hike on December 19 (90% vs <60% a week ago). 

GBP: Sterling reached almost $1.3390 yesterday. It met the (50%) retracement of the losses since the September 17 high (~$1.3725) and reached its best level since October 22. The next retracement target (61.8%) is near $1.3450. However, sterling settled above its upper Bollinger Band for the second consecutive session (found ~$1.3360 today) and is looking stretched. It is consolidating between about $1.3320 and $1.3360 so far today. Still, cable is being helped by the unwinding of short positions against the euro. The euro is coming off of two-year highs against sterling reached in the middle of last month. It has pulled back about 1.6% so far, near GBP0.8720. A break of GBP0.8700 could target the GBP0.8660 area next. The data highlight next week is the October GDP due next Friday. It may be the first increase in the monthly report since June.

CAD: The dollar posted an outside day against the Canadian dollar yesterday. It traded on both sides of Wednesday's range but settled within Wednesday's range to neutralize the technical implication. It reached CAD1.3925, its lowest level since October 29, when both the Federal Reserve and the Bank of Canada cut rates. There may be support a little above CAD1.3900, which holds the 200-day moving average and the (38.2%) retracement of the rally from this year's low (June 16, ~CAD1.3540). There are about $1.1 bln in options struck at CAD1.3990-CAD1.4000 that expire today. Canada reports November jobs data today. The disruption emanating from the US trade policy has dealt a blow to the Canadian economy this year. It has created about 164,500 jobs this year compared with 250k in the first 10 months of 2024. Of those jobs, almost 87k were full-time positions this year vs. 185k in the Jan-Oct 2024 period. The unemployment rate has risen from 6.7% at the end of last year to 7.1% in August and September before easing to 6.9% in October. The median forecast in Bloomberg's survey is for a small loss in overall job creation (+66.6k in October) and a tick up in the unemployment rate to 7.0%. The Bank of Canada meets a few hours before the FOMC decision next Wednesday. There is virtually no chance of a change in policy. Pricing in the swaps market suggest it will stand pat next year. 

AUD: The Aussie's recovery has been dramatic. It has fallen in only one session since November 20. The Australian dollar put in a three-month low on November 21 near $0.6420 before reversing higher. It reached $0.6635 today, its best level since September 18. Recall, on September 17, the Aussie recorded the high for the year, a little above $0.6705. The momentum is strong but maybe too strong. It is pushing above its upper Bollinger Band (~$0.6625 today) and the daily momentum indicators are getting stretched. The Reserve Bank of Australia meets on December 9, and there is no doubt that it will stand pat. Indeed, the derivatives market has begun pricing the chances of a hike around the middle of next year. 

MXN: The dollar ground lower against the peso yesterday, reaching about MXN18.2230, its lowest level since September 18, the day after it recorded the year's low (~MXN18.20). The greenback posted an outside down day, by trading on both sides of Wednesday's range and closed below its low. Follow-through selling today has seen the dollar approach but not take out the year's low. The MXN18.18 area is the (61.8%) retracement of the dollar's rally since last year's low (~MXN16.26) seen before the run-up to the national election and offers a nearby target. Higher Japanese rates and the yen's recovery make yen-carry trades arguably less attractive, but dollar carry trades may be more in vogue. The dollar was sold slightly below BRL5.29 yesterday to reach its lowest level since November 14. The year's low was set November 11 around BRL5.2640. Initial resistance is seen in the BRL5.3240-BRL5.3270 area, where the gap from Wednesday's lower opening is found.