Top Trade Ideas - December 2nd
All eyes are on the labour market.
With shortened trading days, last week felt very quiet. The few headlines were Trump announcing that he will impose an additional 10% tariff on China in January, citing illicit drug trade, alongside 25% tariffs on Mexico and Canada. The latter would end a regional free trade agreement between the three countries. The three countries targeted make up 41.4% of total trade with the U.S.
The core Personal Consumption Expenditures (PCE) index, which strips out food and energy costs and is closely watched by the central bank, rose 0.3% from the prior month during October, in line with Wall Street's expectations for 0.3% and the reading from September. Over the prior year, core prices rose 2.8%, aligning with Wall Street's expectations and above the 2.7% seen in September. Overall PCE increased 2.3% YoY, a pickup from the 2.1% seen in September.
In G10 FX, we saw heavy profit-taking on long USD positions, even with less dovish FOMC minutes and Core PCE inflation ticking higher. Elsewhere, JPY pumped following a strong inflation print.
The Week Ahead
In Europe, fiscal concerns will continue to drive sentiment. France’s political crisis is in focus, with Prime Minister Michel Barnier facing a potential no-confidence vote over the 2025 budget. Concessions on taxes have eased tensions slightly, but far-right leader Marine Le Pen’s Monday deadline for further demands looms large.
U.S. nonfarm payrolls on Friday will be key for risk sentiment, with a 200k expected print potentially bolstering stocks. Earlier in the week, JOLTS data and ISM reports will help gauge the strength of the US economy ahead of year-end.
The market would probably like to see something positive, but not too positive. If it’s incredibly strong, then that raises questions about whether the Fed will actually cut rates. This is the data print that markets are waiting on to decide their bets for the Fed’s December meeting. The inflation side of the mandate was last week. Now, the labour side.
In Asia, PMIs will shed light on China’s fragile recovery as markets await potential stimulus announcements at December’s Politburo meeting.
Meanwhile, Japan’s labour cash earnings data will be key for markets to assess whether the Bank of Japan will shift its monetary policy stance later in December.
The OPEC+ alliance gathers online on Thursday to decide on extending production curbs.
FX
Our reasoning behind our short USD/JPY trade last week was sound, and it was frustrating to get stopped just before the sharp move lower.
However, our take profit was set at 151.25, with the pair closing significantly below that at 149.70. It surprised us how swift the move was, especially when Tokyo CPI was only modestly ahead of expectations. Even if the BoJ do move in Dec, we’re talking max of a 25bps hike, which is hardly in jumbo territory.
On the techs, the week opening will be key to see if support levels are broken. We’re happy to flip to being long and try to catch this falling knife with a tight stop below.
TRADE IDEA - PLAYING IT TIGHT ON USD/JPY
Entry: 149.70
Stop Loss: 149.30
Take Profit: 151.25
GBP/CHF managed to hold and turn higher from the 1.1100-1.1130 region again (shown below in orange), which gives us confidence that even in this tight range, the downside is well protected.
In such an environment, harvesting yield from selling options can be a nice play here. Selling downside is a risk, but CHF is unlikely to materially strengthen while the current cross-asset risk-on mood is in flow.
Given the forward pricing and interest rate differential, selling a put close to the ATMF strike nets an attractive premium.
TRADE IDEA - SELLING DOWNSIDE ON GBP/CHF
Sell a 3-month 1.1150 strike put and receive 1.45%