USD breaks higher, stocks sold as 2025 kicks off

* Dollar hits new cycle highs on economic strength and euro weakness

* Stocks stumble on first trading day of 2025 as Tesla shares weigh

* Gold posts biggest jump in nearly two weeks on haven demand

* US launches probe into Chinese semiconductor industry

FX: USD hit fresh two-year highs to start the new year. Prices had been consolidating in a bullish fashion over the festive period below recent highs around 108. Treasury yields were mixed with the 10-year hovering just below the December top at 4.63%. We note September 2024 low below 3.6%. Weekly initial jobless claims fell to an eight-month low. This data highlights an economy typical of one with few layoffs.

EUR broke down through the November bottom at 1.0331 and 1.03 the figure to a low at 1.0222. These are levels last seen in 2022. The ECB is in rate cutting breaking mode and the Fed is not. That means monetary policy divergence. Trump’s tariff threats and eurozone political uncertainty add to the bearish mix. Numerous Wall Street strategists expect to see parity in the major this year.

GBP underperformed, breaking down in a similar way to the euro. Prices had been in bearish consolidation mode, tracking sideways above 1.25. Yesterday’s low was 1.2351 with bears eyeing up the April 2024 low at 1.2299. The pound was the best performing major currency last year.

USD/JPY traded in a relatively narrow range, mirroring the small range in the 10-US Treasury yield. The pair has risen for the last four straight weeks. Markets were disappointed with the less hawkish than expected BoJ meeting last month. Governor Ueda didn’t signal a January rate hike.

AUD outperformed along with other commodity dollar currencies. The major has dropped for five consecutive weeks. It is now close to the key long-term low from October 2022 at 0.6169. USD/CAD has tracked sideways around and just below 1.44 since before the holiday period. January is the worst month for the loonie versus USD. As we said in our last report, domestic politics is a mess and US tariffs are potentially coming soon. The BoC is expected to cut rates, in contrast to the FOMC.

US stocks: The S&P500 closed down 0.22% at 5,869. The tech-heavy Nasdaq settled 0.17% lower at 20,976. The Dow finished at 42,392, down 0.36%. Consumer discretionary saw the biggest losses, weighed down by Tesla. The EV-maker reported disappointing Q4 delivery numbers, with annual deliveries falling for the first time since 2011. Energy, utilities and communication services outperformed. The former was buoyed by crude and natural gas price upside. Gas prices were supported by the expiration of the Ukraine gas transit deal.

Asian stocks: Futures are mixed. Asian equities were mixed with China underperforming. The Caixin manufacturing PMIfell to 50.5 in December from 51.5 and expectations of 51.7.

Gold popped higher, up over 1.2% on a cautious risk mood. Prices have hit the 50-day SMA at $2657. The yellow metal is expected to continue to benefit from global central bank buying. But gains are forecast to slow after last year’s bumper 27% rally.

Review of Data – China PMI, Tokyo CPI

We’ve already had some interesting data from Asia to start the new year.In Japan, the Tokyo CPI is a forerunner to nationwide inflation figures. The numbers showed that core inflation rose to 2.4% year-on-year in December compared to 2.2% in November. The release was important since it could give some indication of when the Bank of Japan will make its next rate change. At the moment, markets price in around a 40% probability of a rate hike at the January meeting.

China’s manufacturing PMI slowed to 50.5 in December from 51.5 in November, missing expectations. New orders fell to a three-month low and export orders slid into contractionary territory after dropping for the past five months.  Going forward, increased fiscal support should continue to lift growth in the near-term, given that deficit spending is likely to be front-loaded at the start of 2025. More proactive policies, as highlighted by President Xi in his New Year’s speech, will also be important and something we will be watching closely. This comes especially amid concerns over potential tariffs from Trump’s return to the White House.

Chart of the Day – Dollar march higher continues

Is there no stopping the greenback? USD had a strong 2024 with it pushing sharply higher in the final quarter. The December FOMC meeting was hawkish, after officials published slower and limited rate cuts – two in the median dot plot versus four seen in the September projections. Allied to Trump’s victory and potentially inflationary mix of policies means more dollar buying. Lower fiscal policy may be a worry, but it is likely too early for that.

Seasonals are typically positive for the buck in January and the first quarter amid heightened volatility. ISM manufacturing will be in the spotlight today ahead of the crucial NFP data next Friday. Long-term levels in the dollar index include 109.50 and 110.50. We always note that the euro has a big weighting (56%) in this index. Prices are overbought on several timeframes.

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