Dollar’s dominant grip on FX markets to loosen further

BENGALURU, Dec 6 – The dollar will loosen its grip on other G10 currencies in 2024, with a dimmer outlook for the currency as the US Federal Reserve was expected to start cutting interest rates next year, a Reuters poll of FX strategists found.

Dominating currency markets since mid-2021, the dollar stayed relatively strong for the better part of this year but lost momentum after a few Fed officials made dovish comments last week.

Erasing all of its yearly gains, the dollar index fell 3.0% in November, its biggest monthly drop in a year.

Much of the greenback’s strength was down to the US economy’s superior performance compared to its peers. The world’s largest economy expanded at an annualized rate of 5.2% last quarter, the fastest pace since Q4 2021.

While analysts expected the currency’s weakening trend to continue into next year, median predictions in the Dec. 1-5 Reuters poll of 71 analysts showed a majority of the falls coming in the later part of 2024.

“We are looking for the dollar to weaken further next year, but we think the weakness will be more in the second half of next year,” said Lee Hardman, senior currency strategist at MUFG.

“In the first half of the year, we’re still relatively cautious about predicting a bigger dollar sell-off because we think the global growth story outside of the US still remains very, very weak and challenging.”

While predictions showed the dollar will remain resilient in the first six months of 2024, there was no clear consensus on what will drive the currency’s performance.

Among analysts who answered an additional question, 20 of 47 said interest rate differentials, 17 said economic data and seven said safe-haven demand. The remaining three gave varied reasons.

“We are at that turning point in the global economy and central bank policy that maybe it is creating more uncertainty over what’s going to be the key drivers for FX markets over the next six months,” added MUFG’s Hardman.

But beyond that time period, economic growth and currency valuations were likely to dictate currency moves.

“From Q2 onwards … we do think cyclical conditions globally will begin to improve and that should lead to markets moving away from being driven primarily by rate dynamics and move towards cyclical dynamics and valuations where the likes of EUR/USD and USD/CAD will all of a sudden look cheap on that basis,” said Simon Harvey, head of FX analysis at Monex Europe.

The euro EUR=, which is up 1.0% for the year was expected to end December at USD 1.08, around the same level it was seen trading on Tuesday.

It was then forecast to change hands at USD 1.09, USD 1.10 and USD 1.12 in three, six and 12 months gaining 0.4%, 1.5% and 3.6% respectively.

The Japanese yen, the worst performing major currency this year, has lost about a third of its value in the past three years and was expected to gain 7.4% to trade at 137/dollar in a year.

Sterling, already up over 4.0% for the year was predicted to gain 1.7% to USD 1.28 in a year.

(Reporting by Hari Kishan; Polling by Prerana Bhat, Pranoy Krishna, and Anant Chandak:
Editing by Nick Zieminski)

Gold’s record run faces speed bumps, but new peaks beckon

Dec 5 – The momentum propelling gold to a record USD 2,135.40 per ounce on Monday may fizzle short-term, due to uncertainty over the timing of US monetary easing, but wider geopolitical risks should also drive further gains towards fresh peaks, analysts said.

Safe-haven inflows driven by war in Ukraine and the Middle East, coupled with bets for a cut in US interest rates – making zero-yield gold more attractive than competing assets such as bonds and the US dollar – have driven a more than 10% rise in bullion prices.

Gold vaulted on a more dovish tilt by the Federal Reserve, but has since given up some of those gains.

“Bullish expectations have been brought forward into the first quarter of 2024 but it is not going to be a straight line to revisit the all-time peak again,” said Nicky Shiels, head of metals strategy at MKS.

Steady central bank purchases led by China have also supported gold this year and this should continue next year, analysts noted.

Holdings in the largest gold-backed exchange traded fund (ETF), the SPDR Gold Shares ETF, posted net inflows of over USD 1 billion in November, the most since March 2022.

However, most analysts have highlighted that prices will pull back near-term, before resuming the climb next year to target USD 2,150 to USD 2,300 per ounce.

“Gold has been known to price in monetary policy expectations prematurely over the past two years. While we expect the Fed’s next move to be a rate cut, we do not expect it to materialise immediately,” Standard Chartered analyst Suki Cooper said.

(Reporting by Ashitha Shivaprasad and Brijesh Patel in Bengaluru; additional reporting by Deep Vakil and Anushree Mukherjee; Editing by Arpan Varghese and Josie Kao)

Stock-hungry volatility funds, ‘gamma-heavy’ options dealers could buoy US equities

NEW YORK, Dec 5 – An epic rally in US stocks has sent Wall Street’s fear gauge to a post-pandemic low. Options strategists believe market gyrations may stay subdued for some time – potentially smoothing the way for further gains in equities.

The Cboe Volatility Index, which measures investor demand for protection against stock swings, is hovering just above that low of 12.45 hit late last month, in contrast with a long-term average level of about 20.

The move occurred as expectations that the Federal Reserve is done cutting interest rates fueled a rebound in the S&P 500, taking the index to a new closing high for the year. The S&P 500 is up 19% year-to-date, following a 9% gain in November – its best monthly performance since July 2022.

A 0.5% decline in the S&P 500 on Monday took the VIX to 13.08.

Since the VIX tends to move inversely to stocks, market participants watch it closely as an indicator of investor sentiment and positioning. With momentum firmly on the side of the bulls and investors’ risk appetite high, options mavens say volatility is likely to remain subdued for the remainder of the year.

“Volatility has really collapsed,” said Ilya Feygin, consultant to institutional execution services firm WallachBeth Capital. Feygin believes volatility is likely to remain suppressed until at least to year-end.

Among the factors closely watched by market participants are the funds that take their signals from market volatility, selling when volatility picks up and buying when it subsides. As market gyrations have calmed, these volatility-targeting funds have become buyers of US equities, sucking up some USD 30 billion worth of purchases in the week ended Nov. 30, according to data from Nomura Securities.

If stocks average only a 0.5% move daily over the next month, the funds could buy around USD 21 billion more worth of equities, Nomura strategist Charlie McElligott said, offering upside support for stocks into year-end.

Another volatility dampener comes from options dealers, who act as intermediaries between buyers and sellers. These dealers are now net long “gamma” – meaning they have to sell stock futures when markets rally and buy futures when markets sell off in order to square the risk on their books.

“Hedging flows associated with this should restrict market movements,” Brent Kochuba, founder of options analytic service SpotGamma.

History also shows that once volatility expectations become subdued, they can linger at low levels for a while. The VIX took anywhere from three weeks to more than three months to break decidedly above 13 the last five times it fell below that level for more than a couple of days, a Reuters analysis showed.

Overall, the VIX has been below 13 for roughly 20% of its three decade history.

The calm in markets has rewarded those betting against volatility. The 1x Short VIX Futures ETF SVIX, which tracks the Short VIX Futures Index and seeks to provide greater returns as volatility falls, is up 135% for the year, making it the 20th best performing US-listed ETF, according to VettaFi data.

Still, some market watchers see a potential warning sign in the recent calm.

In November, traders’ expectations of S&P 500 30-day implied volatility – which measures expectations for stocks’ gyrations – fell below 30-day realized volatility – or how much stocks were actually moving – by the widest margin since December 2022.

The last four times a similar drop happened saw the S&P 500 decline, on average, by 8.5% over the next 31 days, data from Cantor Fitzgerald showed.

Eric Johnston, Cantor Fitzgerald’s head of equity derivatives and cross asset, said those drops occurred within the scope of a 250% gain for the S&P 500 in the period, which stretched from 2014 to the present.

Nevertheless, hedges bought now would pay well should another market decline materialize, he said.

Implied volatility falling below realized volatility, “tends to be the calm before the storm,” Johnston said.

(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Grant McCool)

Trend hedge funds start holiday season by buying stocks, JPMorgan says

LONDON, Dec 5 – Trend-following hedge funds began December in a bullish mood, buying US, European, and Japan stocks, a prime brokerage note from JPMorgan said.

The S&P 500 and Japan’s blue-chip Nikkei both rallied almost 9% in November. European shares posted gains of over 6%.

Hedge funds overall finished November by posting a 2.3% positive performance result, said the bank in a note released on Sunday and seen by Reuters.

They did best with a 3.2% return in Europe, Middle East, and Africa, with a 2.1% return in North America, and were marginally positive in Asia with a 0.5% positive result, the note said.

Trend hedge funds, or CTAs (commodity trading advisers), trade systematically – meaning they try to catch market moves big enough to be a trend.

Systematic hedge funds recovered from losses earlier in the year in the October bond sell-off, with government bond yields from the United States to Germany hitting multi-year highs as concern about elevated interest rates and high debt levels took hold, hurting stocks in turn.

These hedge funds typically take hundreds of small bets across equities, bonds, commodities, and currencies.

Stocks of companies that distribute materials as well as firms that make discretionary products consumers like to buy but do not need, did well for these traders but they suffered losses speculating on financial stocks, including banks, said JPMorgan.

(Reporting by Nell Mackenzie; editing by Barbara Lewis)

Dollar regains ground after sell off; bitcoin breaches USD 42,000

WASHINGTON, Dec 4 – The dollar ticked higher on Monday, regaining some ground after falling for three straight weeks on bets that the US Federal Reserve will soon be cutting interest rates, while bitcoin breached USD 42,000 for the first time since early 2022.

The dollar index, which tracks the currency against six major peers, rose by 0.54% to 103.67, while the euro was last down 0.49% to USD 1.0828

“We’re kind of seeing a rebound and reshaping of expectations back to what we expected towards the end of the year,” said Helen Given, FX trader, at Monex USA in Washington.

Fed Chair Jerome Powell said on Friday that the central bank was prepared to tighten policy further if needed, but also said that interest rates were “well into restrictive territory” and were slowing inflation.

“Yes, he said that interest rate hikes are done, but that was already kind of baked in the cake when it comes to the Fed,” said Given. “The more important side of the coin that we saw was that he laid down the law and said that cuts are not coming anytime soon.”

In cryptocurrencies, bitcoin ripped to its highest since April 2022 at more than USD 42,100, buoyed by expectations that US regulators will soon approve an exchange-traded bitcoin fund. It was last at USD 41,912.

“An approval is expected to bring short-term capital influx from the traditional finance investors, fueling the uptrend, while a rejection might trigger a short-term negative price action due to high expectations of approval by market participants,” said Matteo Greco, a research analyst at fintech investment firm Fineqia International, in a note.

Investors’ bets that the Fed’s rate-hiking cycle is over have also boosted riskier assets in financial markets. The key data point for investors this week is the November US jobs report, which is expected to show the American economy added 180,000 jobs last month, up from 150,000 in October.

Last month, the euro rallied 3% against the dollar and hit its highest since August at more than USD 1.10 as data showed US inflation was cooling rapidly. The dollar index dropped 3.1% in November in its biggest monthly fall in a year.

“A lot of people are … realizing that the strength of the euro, primarily because of the US weakness to this point, is now potentially an inflection point,” said Eugene Epstein, Moneycorp’s head of structured products, North America. “The tone of the conversation seems to have shifted a little bit in that direction.”

Sterling was at USD 1.262, down 0.6% on the day, while the Australian dollar was 0.88% lower at USD 0.66140. The US dollar also rose against the Swiss franc, last up 0.41%.

The dollar was last down 0.33% against the yen at 147.300, after falling to 146.24 yen per dollar in the Asian session, its lowest since mid-September.

Data on Monday showed that exports from Germany unexpectedly fell in October, denting hopes that Europe’s biggest economy was stabilizing.

Eurozone retail sales data are due on Wednesday, ahead of Chinese trade figures on Thursday.

(Reporting by Hannah Lang in Washington; additional reporting by Harry Robertson in London and Brigid Riley in Tokyo; Editing by Marguerita Choy and Alison Williams)

Gold retreats from record peak on tempered outlook for Fed rate cuts

Dec 4 – Gold fell more than 2% after hitting an all-time high on Monday, but zero-yield bullion’s retreat halted above USD 2,000 an ounce after traders trimmed bets for the first rate cut by the US Federal Reserve in early 2024.

Spot gold slipped 2.1% to USD 2,026.69 per ounce by 2:31 p.m. ET (1931 GMT). Prices swung in a wide USD 115 range but were finally headed for their worst day since February.

US gold futures settled down 2.3% at USD 2,042.20.

Early in the Asian session, gold hit a fresh record high of USD 2,135.4 on growing confidence about a rate cut following Fed Chair Jerome Powell’s comments on Friday.

“Despite the fact that we are closer to a Federal Reserve pivot, it may be premature to see these prices being sustained… this market is getting a little tired,” said Bart Melek, head of commodity strategies at TD Securities.

“We’re going to need more catalysts, and they will come in the form of weak economic data.”

The Fed appears on track to end the year with interest rate hikes as a thing of the past, but with a coming challenge over when and how to signal a turn to rate cuts.

Pressuring gold, the dollar index rose 0.5%, making bullion more expensive for other currency holders. US 10-year Treasury yields also ticked higher.

Traders saw a 57% chance for a rate cut by March, down from 63% on Friday, CME’s FedWatch Tool showed. Lower rates reduce the opportunity cost of holding bullion.

Data last week pointed out cooling inflationary pressures and a gradually easing labor market reinforcing the notion of an early rate cut.

Traders are awaiting Friday’s release of US non-farm payrolls data, which could help further gauge the interest rate outlook.

Silver slipped 3.6% to USD 24.50 per ounce, set for its worst day in two months after hitting a seven-month peak earlier in the session.

Palladium fell 1.7% to USD 917.31, and platinum dipped 2.8% to USD 972.67.

(Reporting by Anushree Mukherjee in Bengaluru; Editing by Shailesh Kuber and Maju Samuel)

FX traders badly positioned for sharp rate change expectations

Dec 4 – FX traders are badly positioned for the recent sharp change in expectations for US interest rates.

The possibility of further tightening and a strong belief that rates would remain elevated for a long time have been swiftly replaced by the probability of a cut as early as March next year.

Traders who are predominantly betting that the dollar will rise have had little time to change their positions, leaving a lot of these bullish bets exposed during a month when liquidity is apt to fall and potentially exacerbate the extent of any dollar drop.

Positioning data is masking the extent of the issue because other traders have added to bets on EUR/USD rising, a single position now almost as large as all the others combined.

Excluding bets on the euro, those placed on the dollar rising total around USD 23 billion, which is large enough when supported by fundamentals but probably unsustainable given the about turn on the interest rate outlook.

Bigger bets against JPY, INR, MYR, AUD, and CAD are the most vulnerable but with traders also betting against NZD, GBP, and CHF, and no sizeable bets against the USD versus any of the Asian currencies in Reuters FX poll, they have much to worry about.

(Jeremy Boulton is a Reuters market analyst. The views expressed are his own.)

Gold takes a breather after record run on rate cut bets

Dec 4 – Gold edged down after scaling a record high on Monday, with growing confidence that the US Federal Reserve would cut interest rates early next year, keeping bullion well above USD 2,000.

Spot gold slipped about 0.1% at USD 2,069.86 per ounce by 1203 GMT. US gold futures also fell 0.1% to USD 2,088.90.

“If signs of low interest rates become more evident, gold should continue to soar next year. Yet, the price of the precious metal will not move in a one-way street upwards,” with technical indicators suggesting the market has overheated, said Alexander Zumpfe, a precious metals trader at Heraeus.

While there may be short-term profit-taking, “this doesn’t change the fact: The sentiment for gold is positive,” he added.

Keeping gold’s gains in check, the dollar index edged up 0.1%, making bullion more expensive for other currency holders.

Earlier in the Asian session, gold jumped nearly 2% to a record high of USD 2,111.39 on renewed expectations of a rate cut following Federal Reserve Chair Jerome Powell‘s comments on Friday.

Traders are now pricing in a 70% chance for a rate cut by March, CME’s FedWatch Tool showed. Lower rates reduce the opportunity cost of holding bullion, which yields no interest.

However, “in the near term, gold could fall below USD 2,000/oz if earlier Fed pricing proves too aggressive. Ultimately, we are buyers on dips and forecast USD 2,250/oz by end-2024,” UBS said in a note.

Comex gold speculators raised net long position by 29,517 contracts to 144,410 in week to Nov. 28, data from the Commodity Futures Trading Commission showed on Friday.

Traders now await the U.S. non-farm payrolls numbers on Friday, which could help further gauge the interest rate outlook, after data last week pointed towards cooling inflationary pressures and a gradually easing labour market.

Silver XAG= slipped 0.1% to $25.17 per ounce, palladium fell 1.1% to USD 989.07, and platinum dipped 0.5% to USD 928.42.

(Reporting by Anjana Anil in Bengaluru, Additional reporting by Ashitha Shivaprasad, Harshit Verma, and Anushree Mukherjee; Editing by Varun H K and Sohini Goswami)

Bull market in view after S&P 500 hits fresh year-high

NEW YORK, Dec 4 – The bull is nearly loose.

The S&P 500’s feverish late-year rally has brought the index to its highest level of 2023, leaving it just 4.2% away from the all-time peak reached in January 2022.

A close above 4,796.56 on the S&P 500 would confirm that the index has been in a bull market since bottoming out on Oct. 12, 2022, by one commonly used definition. The benchmark index is up 19.7% for the year and has risen 28.5% from its October 2022 low.

A look at bull markets of the past suggests that investors should expect stocks to take a breather before marching higher.

At the same time, plenty of obstacles remain for U.S. stocks, including the possibility that the Fed’s rate hikes chill the economy, upending the soft-landing hopes that have propelled equities higher.

SMALLER THAN YOUR AVERAGE BEAR

With the S&P 500 closing at a new year-high on Friday investors are close to getting confirmation that the bear market that started in January 2022 is over.

Some investors define a bear market specifically as a decline of at least 20% in a stock or index from its previous peak. By that definition, the bear market that began when the S&P 500 hit its previous record on Jan. 3, 2022 was not particularly painful.

The S&P 500 closed down 25.4% at its lowest point, making this the fourth shallowest bear market experienced by the index since 1928, according to data from Yardeni Research.

At the same time, at 282 calendar days, it was somewhat shorter than the average bear market length of 341 days, based on data from Yardeni Research going back to 1928.

STRONG LIKE BULL

History also suggests that bull markets tend to feed off themselves, as strong stock performance pulls investors off the sidelines and boosts appetite for risk.

Over the past 50 years, stocks have witnessed an average gain of nearly 260% during the six bull markets that have occurred.

NOT SO FAST

Of course, stocks rarely rise in a straight line. Over the last 50 years, the S&P 500 has risen an average of 16% in the three-month period leading up to a bull market.

By contrast, the S&P 500 has logged average gains of just 0.2% and 2.0%, in the one-month and three-month period after a bull market is confirmed.

SPEED BUMPS AHEAD?

At the same time, there is no shortage of factors that could slow a rally or hurt investor confidence.

Many investors are watching the U.S. economy: Expectations of an economic soft-landing, where the Fed manages to cool inflation without badly hurting growth, have supported the rally in stocks. But signs that the Fed’s 525 basis points of rate increases are slowing growth more than expected could argue for a more cautious approach to stocks and other so-called risky assets.

One recession signal, the inverted yield curve, continues to hang over investors. Yields on two-year Treasuries have stood above those on 10-year Treasuries since July 2022. The 2/10 year yield curve has inverted six to 24 months before each recession since 1955, a 2018 report by researchers at the San Francisco Fed showed.

(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Lisa Shumaker)

Oil falls on doubts OPEC+ will make further cuts

HOUSTON, Dec 4 – Oil prices fell on Monday on concern about a drop in demand and on continued uncertainty about the depth and duration of OPEC+ supply cuts.

Brent crude futures settled down 85 cents, or 1.08%, at USD 78.03 a barrel. US West Texas Intermediate crude futures finished down USD 1.03, or 1.39%, at USD 73.04.

Monday’s fall adds to a 2% decline last week after the supply cuts announced on Thursday by the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, together known as OPEC+.

“The market has decided (OPEC+ production plans) are not going to have that much of an impact. It’s more style over substance,” said Andrew Lipow, president of Lipow Oil Associates, said about crude traders on Monday.

Saudi Arabia’s energy minister Prince Abdulaziz bin Salman said in a televised interview with Bloomberg on Monday that he expected OPEC and its allies to bring about the 2.2 million in crude oil production cuts announced last week.

“I honestly believe that the delivery of the 2.2 will happen,” Bin Salman said. “I honestly believe that will continue to happen (and the) 2 million will overcome even the huge inventory build that usually happens in the first quarter.”

OPEC+ last week announced production cuts that are voluntary in nature, raising doubts about whether or not producers would fully implement them. Investors were also unsure about how the cuts would be measured.

Traders over the past five months have waited to see if cuts in production as well as predicted changes in demand would come to fruition, said Zane Curry, vice president of markets and research for Mobius Risk Group.

“We’ve become Missouri, the Show-Me state,” Curry said.

Surveys on Friday showed global manufacturing activity remained weak in November on soft demand, with eurozone factory activity contracting, while there were mixed signs on the strength of China’s economy.

“The OPEC+ ‘deal’ last week was unconvincing to say the least,” said Craig Erlam, analyst at brokerage OANDA. “And with markets seemingly anticipating more of an economic slowdown next year, the announcement simply doesn’t go far enough.”

Elsewhere, Western countries have stepped up efforts to enforce the USD 60-a-barrel price cap on seaborne shipments of Russian oil imposed to punish Moscow for its war in Ukraine.

Washington on Friday imposed additional sanctions on three entities and three oil tankers.

(Reporting by Erwin Seba; Additional reporting by Alex Lawler, Mohi Narayan, and Florence Tan; Editing by David Goodman, Sharon Singleton, Susan Fenton, Bill Berkrot, and Lincoln Feast)

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