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In today's newsletter, financial markets are witnessing a temporary stall following November's robust rally, prompting discussions on potential interest rate cuts. Bitcoin surged past $41,000, and gold briefly reached an all-time high, while the 10-year Treasury yield rose to 4.25%. The S&P 500's overbought status and Fed Chair Jerome Powell's caution on rate cuts add to the uncertainty. Concurrently, gold climbs to new heights, driven by expectations of a Federal Reserve policy shift and strong year-end seasonal trends, with a 12% year-to-date rally linked to market expectations of a Fed rate cut. Meanwhile, the yen remains resilient despite low yields, as the Bank of Japan maintains its stance, adjusting the yield curve control. Despite technical concerns, gold's bullish outlook persists, and the yen's movements may be influenced by external factors and market positioning amid expectations of Fed rate cuts in 2024.

– Matheus Zani & Daniel Porto

R&D Featured Article

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2. Gold Climbs Amid Expectations of Shift in Policy

Spot gold hit new all time highs (USD 2,135) driven by anticipation of a Federal Reserve policy shift and favorable year-end seasonal trends. The precious metal has maintained its haven status in the face of economic uncertainty, high inflation, and interest rates, supported by geopolitical tensions in the Middle East. A 12% year-to-date rally is attributed to swaps markets pricing in a 25 basis point Fed interest rate cut by May, as gold's inverse correlation with the dollar and US real yields suggests bullish prospects if the Fed eases policy. Seasonal demand and China's consistent gold stockpiling contribute to the optimistic outlook. While there are technical concerns of a stretched rally with a triple top pattern, hedge funds are increasing bullish bets on gold, and central bank purchases have rebounded globally. Gold exchange-traded funds show stabilizing holdings, and if they start to build, it could signal a positive shift in investor sentiment, making 2024 a potentially strong year for gold.

3. Yen Remains Resilient Despite Low Yields

The Bank of Japan (BOJ) is likely to maintain its current stance despite having adjusted its control of the yield curve in December. The BOJ has reduced its purchase of long-dated bonds by 25% to 150 billion yen, reflecting the decline in the yield on 10-year Japanese Government Bonds (JGBs). With the yield now at around 0.70%, well below the 1% upper bound set by the BOJ, there seems to be no immediate need for the central bank to defend its curve control. The upcoming crucial test involves November data, expected to show a slowdown in annual consumer-price inflation from October, although it is still around 3%. This alone may not prompt the BOJ to exit its negative rate policy. Changes in inflation-adjusted rates' markets are significant, and recent conditions suggest a loosening compared to three months ago.

Despite these factors, the yen strengthened over 2% last month, primarily due to developments on the dollar side. Traders are positioning for the Federal Reserve to cut rates earlier in 2024, which could impact the dollar and improve the yen's prospects. The BOJ's meeting on December 19 is anticipated, but the yen's movements may be influenced more by external factors and market positioning regarding the Fed's potential rate cuts.

Charted Territory

What to look out for today

EUR ECB’s President Lagarde Speech
EUR ECB’s Elderson Speech
USD Factory Orders
JPY Tokyo Consumer Price Index

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