Japan’s Tankan survey has shown an increase in large industry capital expenditure, with actual growth at 12.6% in the fourth quarter, surpassing expectations of 12%.
The Bank of Japan survey indicates a decrease in trade fears but an increase in cost pressures.
Exchange Rate Movements
PBOC has set the USD/CNY reference rate at 7.0656, slightly above the previous rate of 7.0638.
The EUR/USD pair shows a negative bias, trading around 1.1730 amid a recovering USD.
Gold is stable above $4,300, benefiting from geopolitical uncertainties and expectations of US Fed rate cuts.
In the week ahead, market attention focuses on US NFP and CPI data, along with meetings from BoE, ECB, and BoJ.
Aave’s price is approaching a breakout point, trading above $204, with bullish indicators strengthening.
Investment Decisions and Risks
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The strong Tankan capex number, at 12.6%, suggests corporate Japan is confident enough to increase spending, even with rising cost pressures. This is a significant shift from the more cautious sentiment we saw a couple of years ago and boosts the case for a Bank of Japan rate hike. We see this as an opportunity to consider buying call options on the Japanese Yen, betting that the central bank will finally move to strengthen its currency.
We view the recent Federal Reserve rate cut as the primary driver pushing the S&P 500 higher, particularly in non-tech sectors. However, with the delayed Non-Farm Payrolls and CPI reports due this week, volatility could easily spike and challenge the market’s assumption of two more cuts next year. To manage this risk, we are buying short-dated S&P 500 put options as a cost-effective hedge against an unexpectedly strong jobs or inflation report.
Gold holding firmly above $4,300 an ounce is a direct result of the Fed’s dovish stance, a level that reflects serious concerns about currency debasement compared to the $2,400 highs back in 2024. Geopolitical uncertainty, highlighted by the attack in Bondi, is providing an additional tailwind for the safe-haven metal. We believe buying call spreads on gold futures allows us to maintain upside exposure while defining our risk in a high-priced environment.
The pound is weak for a reason, with the market now pricing in a greater than 70% probability of a dovish interest rate cut by the Bank of England on December 18th. This follows a recent string of disappointing UK economic data, including a surprise contraction in last month’s GDP. This policy divergence with the ECB, which is expected to hold firm, makes buying put options on the GBP/USD pair an attractive strategy for the coming days.
Beyond the major central banks, we are closely watching for the release of China’s retail sales and industrial production figures. A weak showing here, especially after the PBOC just guided the yuan weaker, could signal a broader slowdown and weigh on risk assets like the Australian dollar. The ongoing peace talks in Ukraine add another layer of uncertainty, reinforcing the value of holding hedges even as equity markets grind higher.
