Trade Recommendation

Last week’s European fiscal announcements should lay the groundwork for stronger growth, higher inflation, and last week’s ECB decision likely being the penultimate cut. Following recent fiscal announcements, our new ECB view now envisages just one more 25bp cut in June to a 2.25% terminal depo rate. A combination of support from the CDU/CSU/SPD (the incoming government) and the Greens means the plans should pass a vote on Tuesday in the existing Bundestag, with a two-thirds majority needed to make changes to the constitution.Hence both because of fiscal expansion as well as reduction in no of cuts, EURO ideally is headed towards 1.15 levels in medium term. There might be some short term drops due to tariff related news from US on European exports. But these drops might be utilised to buy EURO. Markets are still pricing in 48 bps of cut (below) which we believe might get limited to maximum 25 bps only for REMCY25. Technically, 1.0725 the 200 DMA might be the best place to buy EURO but we might never get these levels again. Hence as per risk appetite one should distribute longs in EURO from 1.0880 to 1.0720 levels for a target of 1.1480 levels in 3-6 month time horizon.SL at 1.0480. CMP 1.0880

We believe BOJ is set for a 25-bps hike in it’s 24th Jan meeting unless the global financial markets experience mayhem in the first few days of the Trump administration. The two main differences from the December meeting are that the BoJ now has a functional channel of communication with the Ishiba administration and the market pricing for further Fed easing has collapsed. BoJ may speed up the pace if the incoming Trump team, especially Scott Bessent, demands a faster pace of policy normalization. It is our belief that Bessent thinks 1) the Yen is too cheap and 2) the BoJ is too slow in its normalization efforts. Another rate hike will most likely be in the Fall after the Upper House elections in July. Our estimate of the BoJ’s terminal rate is about 1.5-1.75%, meaning that the BoJ will continue its policy normalization in CY26. Also, if Bessent presents Tokyo a choice between higher tariffs against Japan and a stronger Yen achieved by a faster pace of policy normalization by the BoJ, the Ishiba administration will most likely choose the latter. So not only from interest rate differential perspective but also from geopolitics perspective with Trump admittedly in favour of a weaker dollar, JPY looks too cheap to us. With current narrative in US being “higher for longer” at its extreme as seen by only 40 bps of cut being priced in US, there is sufficient buffer for this trade to go right. If at all there is a financial accident in US due to high real rates or because of Trump’s volatile policies, JPY stature of being safe haven also gives strength to our trade idea. Keeping above facts in view, we have a high conviction call on USDJPY moving towards 140 with a stop loss around LTH of 161.85 in July’24.

EURGBP has made a sharp reversal technically from the 0.83 levels & is currently trading at 0.8390 levels. There is bullish MACD signal too along with momentum indicators. Fundamentally GBP is losing it’s charm of attractive valuation due to high service inflation & slowing growth characteristics. The current uptick in UK gilts at a 23-year high is not going to go away immediately. Most of the problem in the UK is domestic: the resilience of wage growth, service sector prices, and fears the new Labour government’s tax and spending measures could stoke inflation. In summary, suddenly UK assets are not looking cheap, they are looking over valued in terms of growth opportunities. Hence the major fall in GBP as well as the rapid rise in UK gilts. But instead of outright short GBP, we are recommending long EURGBP as we believe relatively Eurozone looks a better house than UK now considering BOE is constrained from cuts to preserve growth where as ECB is firmly on it’s way to 125 bps more cut in CY25 because it’s inflation profile is far well behaved. Fiscally also Eurozone looks better than UK because interest costs in Eurozone are well behaved as ECB was well in time to cut rates by 100 bps in CY24.

USDJPY has given a weekly close above 156.75 last week and closed at 157.25. This implies a technical breakout towards testing July’24 highs of 161 levels. 156.75 was a very crucial levels as it was not only the 76.4% retracement of the entire move from 161 levels to 140 levels, it was also the 6 monthly top made in Nov’24. Fundamentally also JPY has not much triggers to correct from here. With BOJ rate hike in 24th Jan meeting being only priced to the extent of 40% currently, JPY might see another depreciation leg towards 160 odd levels mirroring CNH move towards 7.45 levels. Summary: LONG USDJPY at CMP 157.25, TP 160.15 & SL 154.35

CAD has been beaten significantly against USD not only because of DXY strength recently but also because of interest rate differentials. Even after BOC has cut its policy rate in CY24 to 3.25% from 5%, Fed has only cut by 100 bps in similar period. Even going further ahead, markets price in only 39 bps of cut in CY25 from Fed where as they expect 67 bps of cut by BOC in similar period. So, while BOC is fast approaching it’s below neutral level of rates, Fed is likely to remain on hold at least till March. Even current Fed pricing of 39 bps is smaller than the 50-bps cut as shown in the 18th Dec Fed DOTS. Current level of CAD looks to us pricing in maximum optimism on BOC rate cut moves while maximum pessimism on FED cut moves. Hence this provides us a trading opportunity to Short CAD around 1.4650, with TP of 1.4250 and SL at 1.4850. CMP is 1.4450 so we have to wait for our level of 1.4650 to come. Most likely this week's US employment data could trigger such a move.

A combination of factors has led to the USD softer over the past week, including lower US yields (a result of index extension & month end rebalancing), less dovish ECB comments, stronger Japan inflation data, increased China stimulus talk, month-end USD selling and market discussions on seasonal December USD weakness. But we remain of the view that the broad USD strength is likely to remain on a stronger path into next year and especially with our non-consensus view that the Fed will leave policy rates unchanged at the December FOMC meeting. (currently market pricing in 16 bps of cut in Dec). We expect strong upcoming data points this week including US November ISM (2 Dec), ISM Services (4 Dec) before the key November US NFP (6 Dec; our estimate +275K; Consensus +200K). We had a period of USD consolidation in last week of Nov but now we expect Euro to resume it’s downward journey to recent lows of 1.0350. This also fits in with our medium term view that Trump’s expansionary fiscal policy will mean a relatively shallow FOMC rate-cutting cycle. Looser fiscal policy and tighter monetary policy should prove USD-supportive. Summary: SHORT EURUSD (CMP 1.0577), TP 1.0450 & SL 1.0655