The Morning Update

The USD edges higher, oil prices rally, equity markets are up, and US yields rise on Payrolls Friday. Today's nonfarm payroll report is seen as key for investors to evaluate whether the prospects of Fed policy easing in 2024 are justified or if the Fed will keep rates higher for longer. US job growth is expected to have picked up in November with autoworkers and actors returning to the workforce, but the underlying trend is expected to point to a cooling labor market. Nonfarm payrolls are forecast to increase by 180k in November, up from 150k in October, and the US unemployment rate is forecast to hold steady at 3.9% in November. "We're looking for more evidence that restrictive monetary policy and tight credit conditions are having the desired effect, dampening inflationary pressure, not only in the economy more broadly, but also the labor market," said Knightley, chief international economist at ING in New York. "I don't think the Fed will be signaling a desire to cut on the scale that the market is looking to price right now, but they will be pretty happy with the evidence of the cooling jobs market." Alongside the US Nonfarm Payroll data, investors will also be focused on the Michigan Consumer Sentiment Index (Dec) which is expected to tick higher to 62 vs 61.3 in November.

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In other news. China's leaders pledge to spur domestic demand, and economic recovery in 2024. UK watchdog is examining Microsoft's ties to OpenAi. UK inflation expectations fall to a two-year low, BoE survey finds. The EU to give member states power to block Russian gas imports. The shrinking economy in Japan is casting doubt on BoJ rate raise bets. Israel sharply ramps up Gaza strikes, US alarmed. Trudeau's oil-emissions cut to test industry's climate resolve-Bloomber. Bank of Canada Gravelle says immigration curbs long-term inflation. Tesla Cybertruck's stiff structure and sharp design raise safety concerns.

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In currency markets. JPY ends the week up against its G10 peers on BoJ policy hint. Currency markets rebalance ahead of the key US Nonfarm Payrolls data release. CNY eases 0.15%, while Asian currencies are flat on average vs USD. Trading currencies are mixed with ZAR tumbling 0.8%, SEK weakening 0.45%, JPY & NZD down 0.3%, while CHF is flat, AUD & NOK are up 0.1%, and MXN strengthens 0.45% vs USD.

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In commodity markets. Oil and Natural Gas prices rallied by 2%, Gold prices are flat, Silver prices gained by 0.5%, Copper prices jumped by 0.9%, while Wheat prices dropped by 0.8%, and Soybean prices firmed by 0.3%.

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CAD strengthens towards 1.3550 in early trading, finding support by rallying oil and commodity prices heading into the key US jobs data. On Thursday, Bank of Canada Deputy Governor Granvelle called for policy changes to help spur more housing construction to help reduce pressure on inflation caused by the lack of shelter, especially at a time of record immigration. Intraday the the results from the nonfarm payrolls data will drive the currency market direction today.

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EURCAD holds at 5-week lows as strengthening commodity prices helped support the loonie.

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EUR remains range bound holding within 1.0750-1.0800 as investors are sidelined ahead of the key US jobs data. The Euro continues to be capped at 1.0800, struggling to bounce off its 3-week lows after falling domestic inflation levels and stalling economy. Investors are now starting to price in the prospect of the ECB easing interest rates by up to 175 bps in 2024, increasing the interest rate differential vs its G10 peers. The prospect of weakening interest rates in 2024 is expected to keep selling pressure on the Euro, increasing the prospect of testing 1.0500 in Q1/24. The focus will be on US data releases to drive intraday direction to the Euro.

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GBPEUR steadies at 3-month highs with the prospect of further GBP strength in Q1/24 towards 1.1960.

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GBP holds above 1.2550 ahead of the NFP data release. The broad USD rebound and mixed market sentiment are keeping pressure on the pound as investors are sidelined ahead of the NFP data. In a Bank of England survey, UK public inflation expectations for 2024 are expected to drop to 3.3%, which is down from August estimates of 3.6% gathered from the quarterly data. Technically, a break of 1.2550 opens up the potential for further GBP vs USD for a retest of 1.2400.