Abenomics Are Back

The macro point

It's official! Japan is moving towards a massive economic stimulus. The new Prime Minister, who aligns with the Abenomics initiated in 2014, has presented an economic stimulus plan expected to reach a total of 6% of GDP. It's huge. This includes measures to increase defense — as the situation worsens with China — investments in growth, and especially measures to combat inflation, which is starting to affect the most vulnerable households. The market reaction was immediate: an increase in yields on Japanese bonds (without causing concern) and a continued decline of the yen. Why? Until now, the market was expecting a rate hike by the Bank of Japan (BoJ) this month, which would have allowed the extremely undervalued yen to recover. But this is not the government's view, which has been very clear: the central bank must be cautious in tightening monetary policy. As the institution is not formally independent, it is unlikely to go against the will of the executive. Consequently, a rise in key interest rates is postponed to next year. Most importantly, this means that the yen could continue to remain weak. We would not be surprised to see the EUR/JPY pair reach 185 in the coming months.

In the eurozone, the latest economic statistics are far from encouraging. The German economy is ultimately not expected to exit the stagnation it has entered since Covid. The only glimmer of hope is the stimulus plan presented in February, which should begin to have a timid effect on activity next year. However, do not expect a growth boom. In its September forecasts, the European Central Bank (ECB) estimated that growth in the eurozone should be close to 1% in the next three years. This is also our opinion. Even if there are legitimate questions about the state of the American economy, the sad reality is that the United States is likely to outperform the eurozone for a long time. The early 2025 European renaissance is over! From the euro exchange rate perspective, the economic gloom in the Union should not have a decisive influence. Here’s what matters: the rate differential, the evolution of the trade balance, the evolution of investment flows (especially the positions of hedge funds), and sometimes geopolitics.

Across the Channel, the one-week implied volatility on the EUR/GBP has significantly increased in recent sessions. The reason is the presentation of the British budget, which will lead to an inevitable increase in taxation. The UK budgetary situation is reminiscent of France's. The only difference is that we have the ECB as a firewall. On the British side, the Bank of England (BoE) refuses to assume this role. As we explained several weeks ago, the UK is certainly the only European country doomed sooner or later to resort to 'austerity' to restore its public finances. We estimate that market nervousness, which is noticeable in both the currency and bond markets, will continue to weigh on the pound sterling. Upward trend for the EUR/GBP in the medium term.

Finally, a ray of hope in China. The latest statistics, particularly those concerning the profits and margins of large companies, are rather reassuring. They validate the scenario of a gradual strengthening of growth. No notable effect on the yuan, which remains close to 8.20-8.40 against the euro. The fluctuation band is controlled by the Chinese central bank.

Technical point

On the currency market, EUR/USD continues to mark time. The underlying trend is still bullish. We believe the pair could reach the 1.18 level by the end of the year. There is often a bullish rally just around the holiday period. EUR/GBP is the pair to watch right now. Due to British budget concerns, volatility is high. It is close to its 2023 levels, still fortunately far from those of 2022 during the budget crisis under Liz Truss. We estimate the trend remains bullish with a possible peak around 0.89-0.90 in the short term. Finally, regarding Central and Eastern European currencies, the Polish zloty is still holding its own. How to explain this? Resilient economy, especially in terms of industry and retail sales. The only downside is weak wages which might prompt the Polish central bank to lower its key interest rate again. The negative effect on the zloty should be marginal. Since the start of the year, the Polish currency is up 1.8% against the euro.

Announcements to follow

Rate cut or not by the Fed on December 10? Upcoming U.S. statistics—manufacturing ISM and ADP employment survey—are unlikely to decide. In recent weeks, the likelihood of a cut has dropped from 90% to 68% (Polymarket). Some major U.S. banks, such as JP Morgan, now expect monetary status quo. Within the FOMC, opinions are divided. According to our count, seven out of twelve members should vote for further easing. It should pass narrowly. But it’s not guaranteed.

The information presented in this publication is provided to you for informational purposes only and does not constitute an investment advice, an offer to sell, or solicitation of an offer to buy, and should under no circumstances serve as a basis or be taken into account as an encouragement to engage in any investment.