The Morning Update

The USD holds steady, oil prices slip, equity markets are up, and US yields rise on rate-cut bets. Equity markets rallied, while currency markets held on the sidelines as investors wager that global central banks are preparing to pivot to ease interest rate policy. The combination of ECB hawk Schnabel comments that the ECB can take further interest rate hikes off the table given a "remarkable" fall in inflation, and the JOLTs Job openings which dropped to more than 2 1/2 year low as the US labor market cools, giving both the ECB and the Fed room to start cutting rates. Markets are starting to price in six quarter-point rate cuts by the ECB in 2024, a move that could see interest rates drop 150 bps. Elsewhere oil prices slip as China demand concerns outweigh OPEC+ cuts. Bitcoin extends gains by 0.3% to $44,170. Gold prices stabilized after peaking at a record high of $2,135.40 on Monday. In Focus today, US ADP Employment Change, Nonfarm Productivity, CAD BoC Interest Rate Decision, BoC Monetary Policy Statement, and CAD Ivey Purchasing Managers Index will help provide intraday direction to the currency markets.

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In other news. Israel and Hamas engage in fierce clashes in southern Gaza. Economists see the Fed keeping rates at 22-year highs until at least July 2024-FT. UK construction activity contracts for the third month in a row. Republicans tell Biden US aid to Kyiv depends on immigration curbs. President Putin makes a rare visit to the UAE and Saudi Arabia to strengthen relations and the Israel-Hamas war-CNBC. China blue-chip stocks hit a 5-year low, yuan eases after Moody's move.

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In currency markets. Currency markets remain cautious ahead of Friday's key US Nonfarm payroll report, while bets increase that the ECB could begin interest rate cuts as early as Q1/24. China state banks selling USD for a second day to support the CNY. Poland is expected to keep its interest rates on hold today. Sri Lanka expects the second tranche of the IMF program on Dec 12th. Hungary's weak industry and retail data signal a fragile economy. CNY weakens 0.15%, while Asian currencies are flat on average vs USD. Trading currencies are mixed with NOK falling 0.25%, JPY & ZAR are down 0.15%, while CHF & SEK are flat, and AUD, MXN & NZD are up 0.3% vs USD.

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In commodity markets. oil prices dropped by 0.7%, Natural Gas prices dipped by 0.1%, Gold prices firmed by 0.2%, Silver prices weakened by 0.3%, Copper prices strengthened by 0.7%, while Wheat prices are flat, and Soybean prices firmed by 0.4%.

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CAD steadies vs USD as investors focus on the BoC interest rate decision today. The BoC is expected to keep its interest rates on hold at a 22-year high of 5%, while economists polled by Reuters expect the bank to start cutting interest rates in Q2, forecasting that borrowing costs will drop by 1% by the end of 2024. Investors will be focused on the BoC Governors statement for direction on interest rates in 2024, the CAD Ivey Purchasing Managers Index, and the US ADP jobs data to provide direction for the loonie today.

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EURCAD sets a fresh four-week low, dropping nearly 1% in December as expectations grow that the ECB will lower interest rates by 150 bps in 2024.

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Euro edges lower, dropping through 1.0800 ahead of US ADP Jobs data. The combination of a firmer USD and expectations of ECB rate cuts increased selling pressure on the Euro. The key driver for the euro weakness was comments from ECB hawk Schnabel that inflation is falling more rapidly than expected, increasing expectations that EU rates have peaked. Markets are pricing in the prospect of the ECB easing rates by 150 bps which is expected to widen the US/EU interest rate differential and opens up the prospect of Euro potentially retesting 1.0000 in 2024. Intraday a breakthrough of 1.0770 opens up the euro to extend weakness towards 1.0690 next. Intraday US ADP Jobs data results will help drive the euro direction today.

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GBPEUR holds at 4-month highs, up nearly 1% as expectations grow that the ECB will be the first major central bank to be in a position to significantly lower its domestic interest rates.

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GBP looks heavy as it holds below 1.2600, looking vulnerable to breaching 1.2560 next. The pound is being driven by the USD with the absence of key UK data this week while markets are responding to US jobs data ahead of Friday's US key Nonfarm Payroll report which will be a primary driver for currency markets. We remain bearish about GBP vs USD, but bullish about GBP vs its non-USD G10 peers, as the BoE is anticipated, to be slower to ease its domestic interest rates as UK inflations remain higher than its peers. The focus will be on US Jobs data today to help provide intraday direction for GBP, with a break of 1.2550 opening up the potential of a retest of 1.2465 next.