The Sick Man
As with every month, attention will turn to American employment. It is one of the last major statistics before the U.S. Federal Reserve (Fed) meeting in December. It may allow the market to settle a thorny question: will the Fed cut rates by 25 basis points or pause? At Mondial Change, we are still betting on a rate cut. Unlike other analysts, we do not consider that the outcome of the November U.S. presidential election has changed anything in the monetary easing process started in September.
The macro point
Things are getting worse for Europe and the euro. The slow economic decline is now joined by the risk of political crisis in France. Under these conditions, one can only be pessimistic about the single currency. The good news of the week is that a crisis in emerging countries seems unlikely, even if the dollar remains strong in the years to come. The slow decline of the eurozone is continuing. Obviously, the political upheavals in France and the risk of government censorship do not help. Last week, France's borrowing rate jumped above that of Greece for maturities of up to nine years, for example. But the problem is deeper. Europe is unable to cope with Chinese and American competition. The cost of inputs, particularly energy, is too high in Europe. The European continent is also a dumping ground for Chinese overproduction, which pushes inflation down (positive for consumers) but contributes to the process of deindustrialization. The situation is such that France is now poorer than the poorest of the 50 American states, Mississippi. Other European countries are not in a better position. The latest problem: the strengthening of America's financial attractiveness to the detriment of the eurozone. Across the Atlantic, yields on debt securities and stocks are incomparable with what exists on the Old Continent. Result: savers logically prefer to sell their euro assets (such as French stocks) and buy dollar assets to benefit from as high a return as possible. These massive capital flows from Europe to the United States largely explain the recent fall of the euro. And it is not likely to get better in the coming months! Europe increasingly seems doomed to be a vast museum for the European and American middle class. In contrast, the American economy continues to show impressive resilience. With a public deficit expected to be around 5-7% of GDP in the coming years, which allows the American economy to be fueled with capital, the risk of a recession is very low (unless it begins with a financial crisis). The real estate market is not very dynamic but resilient. American households have seen their financial wealth explode in recent months, with the meteoric rise of the American stock market. Finally, Trump's tariff policies could be another factor encouraging foreign companies to relocate their know-how, capital, and factories to the United States. It is not the best of all worlds. But it strangely resembles it. Unsurprisingly, it is a favorable context for the US dollar. In the past, bullish cycles of the dollar were synonymous with emerging market crises. But that was before. Emerging countries have stronger fundamentals. They managed the Covid crisis better than G10 countries. Finally, they often have an external debt level below 60% of GDP and no major sustainability issues with their debt. Take Argentina. A few quarters ago, the country was on the brink of bankruptcy. President Javier Gerardo Milei implemented shock therapy: a 30% reduction in public spending (only universal household allowances were protected), a decrease in the number of civil servants (-75,000 in one year), the elimination of more than 50 state agencies, the end of budget transfers to provinces, etc. Initial results are encouraging: growth is restarting, price drift has been stopped (inflation divided by ten), and the budget deficit, which was around 6% of GDP upon his arrival in power, should be resolved next year. This created some turmoil on the peso, unsurprisingly. But they were quickly contained by the central bank. Turkey was also in a similar situation. The return to fiscal and monetary orthodoxy is bearing fruit: control of inflation, dedollarization of the financial system, increased capital market liquidity, significant improvement in the balance of payments through reduced imports, an improved credit rating for the country, and reduced volatility in the local currency exchange rate. In summary: a crisis in emerging countries seems unlikely, even if the dollar remains strong in the years to come. Currency Hedging 2025 As we have noted, volatility is making a big comeback in the currency market. The strengthening of the dollar does not help many importers during this period of preparing forecast budgets and validating budget rates for the year 2025. If you want to discuss trends with our teams, strategies adapted to your objectives, or conduct an overall audit of your foreign currency flow management, you can schedule a meeting with our trading room. It is free, without commitment, and allows us to engage with our readers!
Technical point
In the foreign exchange market, the EUR/USD stabilized a bit last week. But this is certainly only temporary. All signals are set for a further decrease in the euro. We are not among those who consider a return to parity as feasible in the short term. However, we could see a drop to 1.04-1.0350 in the coming months. Caution. It may also be time to open your coverage portfolio to strategies other than traditional forward contracts. You can find a video overview of these strategies here. The supports and resistances displayed below indicate the respective low and high points within which the rates should evolve during the week. | Weekly Supports | | Weekly Resistances | |
|---|
| S2 | S1 | R1 | R2 |
| EUR/USD | 1.0400 | 1.0420 | 1.0644 | 1.0705 |
| EUR/GBP | 0.8244 | 0.8289 | 0.8401 | 0.8422 |
| EUR/CHF | 0.9249 | 0.9289 | 0.9401 | 0.9421 |
| EUR/CAD | 1.4583 | 1.4605 | 1.4802 | 1.4843 |
| EUR/JPY | 157.35 | 158.00 | 161.13 | 161.99 |
Announcements to follow
Below you will find the publications and events expected to have a major impact on the currency moves.| Day | Time | Country | Indicator | What to Expect? |
|---|
| Dec 02, 2024 | 16:00 | USA | Manufacturing ISM (November) | Previous at 46.5. |
| Dec 04, 2024 | 16:00 | USA | Non-Manufacturing ISM (November) | Previous at 56. |
| Dec 06, 2024 | 14:30 | USA | Employment Report (November) | Previous at 4.1% unemployment rate. |
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