Summary
Looking back at last week, the US Dollar ended its correction and resumed its upward trend, closing up for five consecutive days, while other non-US currencies experienced varying degrees of decline. Looking ahead to this week, the last Central Bank week before the end of 2024 will arrive— the Federal Reserve, United Kingdom, and Japan's central banks will all announce their interest rate decisions. As the Federal Reserve's last interest rate decision for 2024, although the market has nearly 100% priced in a 25 basis point rate cut, the specific wording of the statement and Powell's comments will still provide more clues about the Federal Reserve's policy direction for 2025.
Global Forex Review and Fundamental Summary
The market has reached a consensus expectation of a 25 basis point rate decision this week, but there are still differences regarding the pace of rate cuts in 2025.
On December 18, the Federal Reserve will hold its last interest rate meeting of 2024. The latest data shows that the US November CPI rose 2.7% year-on-year and increased 0.3% month-on-month, with the increase widening by 0.1 percentage points compared to October. Based on the latest economic data performance, the market currently expects the Federal Reserve to continue its pace of rate cuts at this meeting, with a 98% probability of a 25 basis point cut. However, regarding the rate cut pace by the Federal Reserve in 2025, while many voices have lowered their expectations for the number of rate cuts next year, significant differences still exist, and this interest rate meeting is expected to provide more guidance.
As expected, the Eurozone cut rates 25 basis points for the fourth time this year, but Draghi's comments were interpreted as relatively hawkish by the market.
Last Thursday, the European Central Bank cut rates 25 basis points for the fourth time this year as expected, and no longer committed to 'maintaining sufficiently restrictive policy rates for as long as necessary' to reduce inflation. However, Draghi's remarks during the meeting were viewed as relatively hawkish by the market; he mentioned the 'neutral interest rate' (neither stimulating nor restricting the economy) and projected the European Central Bank's estimated interest rate range by the end of 2025 (1.75%-2.5%), which differs from the previous market expectations of a rapid rate-cutting pace in 2025. The Euro strengthened somewhat after the decision was announced on Thursday.
Affected by the latest data and the Labour government's budget plan, the market has lowered its expectations for the Bank of England's rate reduction pace.
Inflation in the UK service sector remains high. Megan, an external member of the Bank of England's Monetary Policy Committee, recently warned that there are doubts about whether the Bank of England's inflation target can be achieved on schedule (i.e., in three years). Moreover, the increased government spending and higher employer costs reflected in the Labour Party government's first budget have intensified market uncertainty regarding the inflation outlook, leading to expectations that the Bank of England's rate cuts will be relatively moderate, with three cuts anticipated in 2025. Currently, the market generally expects the interest rate to remain unchanged at 4.75% during the policy meeting announcement this week.
Analysis of forex futures and options trends
2.1 Important forex futures contract trends (chart)
2.2 Analysis of futures market positions
According to the report released by the U.S. Commodity Futures Trading Commission on the futures market positions for December 10, 2024, the total positions for various currencies last week were as follows: the net long position of the Euro changed by 3,681 lots, the net long position of the Australian Dollar changed by 8,278 lots, the net short position of the British Pound changed by 4,579 lots, the net short position of the Japanese Yen changed by 881 lots, the net long position of the Canadian Dollar changed by 8,332 lots, and the net long position of the New Zealand Dollar changed by 1,218 lots. The currencies that experienced total position changes of long and short last week included the Australian Dollar. In addition, the currencies with single-direction total position changes exceeding 20% included the Canadian Dollar and the New Zealand Dollar.
2.3 Outlook for key currency pairs
AUD/USD
Looking back at last week, the Australian Dollar experienced a rebound followed by a decline on the weekly chart, closing with a long upper shadow.Bearish line.This was mainly influenced by the decreased expectations for a rate cut by the USD, allowing it to remain strong.
The latest employment data for November shows that the unemployment rate decreased from 4.1% in October to 3.9%, much lower than the economists' expectation of 4.2%. The strong employment data has somewhat supported the Australian Dollar, reducing discussions about a rate cut in February. Just a few days before confirming that the labor market remains solid, the Reserve Bank of Australia provided a more moderate assessment of the economy, stating that it is increasingly confident that inflation will return to target levels as expected. This statement quickly increased the market's bets on the RBA cutting rates in February.
Technical aspectCurrently, the Australian Dollar is at the bottom of the monthly range, indicating a short-term need for a rebound. However, on the other hand, nearly three months of continuous decline has caused the Australian Dollar to fall below many benchmarks against the USD.ResistanceThis makes the current trend of the currency extremely weak, and the height and persistence of any rebound may be difficult to anticipate.
2.4. Case of RMB Hedging
(In this section, we will present a series of cases as a risk management method to prevent foreign exchange against the RMB exchange rate volatility.)
Protective Call Strategy for Multinational Companies: Assume a multinational company A holds a long position in USD assets (export contracts expected to receive USD) of 1 million USD, and currently expects the USD to RMB Exchange Rates to rise, but is also concerned about losses due to a possible drop in the Exchange Rates. To set a lower limit protection for the asset value while retaining the potential for asset appreciation, Company A decides to adopt the following strategy to achieve hedging.
Buy 1 million USD Put Options that match the amount of the export contract, with the current USD to RMB Exchange Rates spot price being 7.28. The exercise price of the Put Options purchased by Company A is 7.20, with an expiration date matching the contract payment time three months later.
Upon expiration, if the Exchange Rates fall below the exercise price of 7.28, the company will suffer losses from the exchange rate fluctuations. However, because it has purchased Put Options, the losses will be limited to 【1 million USD * (7.28 - 7.20) + Option Premium】. Conversely, if the Exchange Rates are greater than 7.28 at expiration, the company can normally enjoy the extra exchange gains from that portion, meaning the net income after deducting the Option Premium will increase as the expiration Exchange Rates rise.
Important indicators to watch for the future.
