Yen Weakens, and USD/CHF Steadies Amid Economic Uncertainty

Key events:

• USA - Average Hourly Earnings (MoM) (Dec)
• USA - Nonfarm Payrolls (Dec)
• USA - Unemployment Rate (Dec)

Wednesday’s stock market saw a narrowly mixed outcome following the downturn on Tuesday. The Nasdaq maintained crucial support levels, while Nvidia (NVDA) managed to stay above key thresholds after its sharp decline earlier in the week. On Wednesday evening, Nvidia's shares dipped slightly due to reports that the Biden administration plans to intensify restrictions on chip exports once more.

The Dow Jones Industrial Average gained 0.25% in trading on Wednesday, while the S&P 500 index rose by 0.2%. The Nasdaq composite experienced a marginal decline of less than 0.1% after testing both its 50-day and 10-week moving averages.

Thursday marked a closure for US stock markets as the nation observed a day of mourning in honor of former President Jimmy Carter.

In Asian trading on Friday, the Japanese Yen faced renewed selling pressure, edging closer to its multi-month low against the US dollar. Fresh data revealed a persistent decline in Japan's real household spending for the fourth straight month in November, underscoring economic vulnerabilities. This scenario reinforces the Bank of Japan's cautious stance on further interest rate hikes, further dampening the JPY.

Japan’s Economy Minister Ryosei Akazawa stressed that the country’s economy is at a "critical stage" in overcoming the deflationary mindset and transitioning to growth led by higher wages and investments. Recent figures showed a 0.4% year-over-year drop in inflation-adjusted household spending in November, reflecting the burden of persistently high prices.

Compounding the situation, real wages declined for the fourth consecutive month in November, indicating widening inflationary pressures. These conditions could prompt the Bank of Japan to contemplate another rate hike in the coming months, either in January or March.

Shifting to the Swiss Franc, the USD/CHF pair steadied after three days of gains, trading around the 0.9120 level during Friday’s Asian session. Market participants adopted a cautious approach, awaiting the US monthly employment data before establishing new positions.

The EUR/USD pair exhibited a mild negative trend, trading around 1.0300 in the Asian session on Friday. Eurozone Retail Sales, reported by Eurostat on Thursday, showed a 1.2% year-over-year increase in November, down from October’s revised 2.1% rise. Meanwhile, the preliminary Harmonized Index of Consumer Prices (HICP) for December tempered expectations of a drastic rate cut by the European Central Bank, potentially limiting further depreciation of the Euro.

The Australian Dollar continued its downward trajectory against the US Dollar for the fourth straight day, with the AUD/USD pair nearing two-year lows. ANZ’s prediction of a 25 basis points rate cut by the Reserve Bank of Australia in February further pressured the AUD.

China’s latest inflation data, signaling increasing deflationary risks, failed to bolster the AUD. The Consumer Price Index (CPI) in China rose by 0.1% year-over-year in December, slightly below November's 0.2% increase, aligning with market forecasts. On a monthly basis, the CPI remained flat in December following a 0.6% decline in November, matching expectations. Given the close economic ties between China and Australia, any shifts in China's economic conditions could significantly influence the Australian markets.

Australia’s Retail Sales data indicated a 0.8% month-over-month increase in November, up from October’s 0.5% growth (revised from 0.6%). However, this fell short of the 1.0% increase anticipated by the market. The trimmed mean, a key core inflation measure, dropped to 3.2% annually from 3.5%, approaching the RBA’s target range of 2% to 3%. The market remains split on the RBA’s likely moves in February, though a quarter-point rate cut in April is fully priced in.

In the UK, the GBP/USD pair remained under pressure for the fourth consecutive day, trading around 1.2300 during Friday’s Asian session. The pair hit a low of 1.2238 on Thursday, its weakest since November 2023, as concerns over the UK’s fiscal and inflation outlook weighed heavily on investor sentiment.

Despite a surge in long-term UK bond yields, with the 30-year yield reaching its highest level since 1998 and the 10-year yield touching levels last seen in 2008, the British Pound didn’t gain strength. Typically, higher yields would support the currency, but in this case, the decline reflected capital outflows driven by fears of persistent inflation and fiscal instability.

UK Chief Secretary to the Treasury Darren Jones reassured on Thursday that UK financial markets were functioning "orderly." Nonetheless, market reactions led to further Pound depreciation andxpectations for additional rate cuts by the Bank of England later this year.

Market participants remained focused on the upcoming US December nonfarm payrolls report, due later on Friday. Several Federal Reserve officials expressed caution regarding potential rate cuts, citing ongoing inflation concerns and uncertainties associated with the incoming Donald Trump administration. Boston Fed President Susan Collins emphasized the need for cautious advancement with future rate reductions, while Fed Governor Michelle Bowman suggested holding rates steady until inflation shows a clear downward trend.