Lack of Clarity

The macro point

It went somewhat unnoticed, although it is significant. Yields on Japanese sovereign bonds have continued to rise over the past week, reaching levels not seen since the late 1990s. Why? Partly due to expectations of rate hikes by the Bank of Japan (BoJ). However, we doubt that the central bank will increase the cost of money this year. Japanese Prime Minister Takaichi reaffirmed her support for an accommodative fiscal policy and once again urged the central bank not to raise rates too quickly to finance her stimulus plan. Under these circumstances, we find it hard to see how the yen could recover. On the contrary, it should continue to reach new records in the weeks to come.

In Europe, attention has focused in recent days on the United Kingdom as the budget proposal is set to be presented in a few days. It's as delicate as the French situation. The good news is that the monetary policy is clear. The money market anticipates that the Bank of England (BoE) will lower its key rate twice by April, while the European Central Bank (ECB) should keep the cost of money unchanged over the same period. All of this is already priced into the market. Therefore, even though the underlying trend is still bullish, the potential for the EUR/GBP to go much further is limited, in our view.

A few ripples in recent sessions regarding the Hungarian forint. But nothing worrisome. Ahead of the April elections, as always, the Orban government wants to further ease its monetary policy. This will compel the central bank to maintain a restrictive policy at least through the first part of 2026. This should be beneficial for the forint – via carry trade strategies. The Hungarian currency has already performed well since January, both against the euro and the dollar. Furthermore, it is the Central and Eastern European currency favored by foreign investors for carry trade.

On the American side, the end of the shutdown did not bring the clarity some had hoped for. In the absence of October's inflation and unemployment figures, it's hard to know the true state of the economy. Many secondary indicators confirm points of tension, particularly in private credit, and a pauperization of part of the population. According to a CBS study, about a quarter of Americans struggle at the end of the month. That's obviously huge. Additionally, the number of rejected credit applications is skyrocketing – indicating a deterioration in the financial situation of American households. But it's hard to draw hasty conclusions. The American economy has been two-tiered since Covid: 60% of the population has largely benefited from wage increases and various government aids, while 40% is nearly in recession, having been hit directly by rising prices, unemployment, and high personal debt.

The inability to see clearly economically should not, however, prevent the Federal Reserve (Fed) from lowering its key rate in December by 25 basis points. There are obvious divergences among FOMC members – as we highlighted last week. But all agree that the neutral rate is far from being reached. Therefore, another rate cut is appropriate. Caution, the money market is a bit skeptical. Only 50% of participants are betting on further easing next month. That's little.

Technical point

For once, it is risk aversion on stocks that has influenced currency movements. Investors are questioning a possible AI bubble. The consequence? They are selling American stocks, creating a little panic. On the foreign exchange market, this translates into a retreat to safe-haven values. The Dollar Index, which measures the greenback's performance against a basket of major currencies, rebounded to the resistance located at 99.70 over the past week. But it’s the yen and the Swiss franc that are the main winners of the current movement. The EUR/JPY pair now has a good chance of reaching a record 182. Regarding the Swiss franc, we note that it continues to strengthen against its main counterparts, especially since the Swiss National Bank (SNB) decided to refrain from intervening on the FX.

We wouldn't be surprised if risk aversion persists for a few more weeks, or even until Christmas.

Announcements to follow

The week will be a bit shortened due to Thanksgiving festivities starting Thursday. On this occasion, American stock markets will be closed, resulting in a drastic drop in liquidity across all financial markets, including Forex. Therefore, we can consider that currencies will be in freewheel on Thursday and Friday, with limited movements. In terms of indicators, the first estimate of US GDP for Q3 should confirm that the US economy remains resilient – even if the 3% rise observed in Q2 is an anomaly related to tariffs. Gone are the fears of a recession!

European news is light in this period. November inflation in France and Germany will be released on Friday. No surprises expected. The eurozone has returned to economic stagnation (low growth, low inflation).

The information presented in this publication is communicated to you for informational purposes only and does not constitute investment advice, a sales offer, or a solicitation to purchase, and should not be used as a basis or be taken into account as an incentive to engage in any investment.