- The Fed’s interest rate increases this year have outpaced those of other central banks, fueling US dollar (USD) strength for most of the year. However, with the Fed softening its hawkish stance on rate hikes and the terminal rate in sight, interest rate divergences are expected to play less of a role in currency determination in 2023.
- Equity markets strengthened on strong US consumer confidence numbers last week as consumers welcomed lower oil prices and inflation outlooks. The impact on currencies was muted, however.
- China will reopen the country on January 8, 2023, signaling a return of the bull market and raising hopes for the travel business.
- This week, more US housing data will be released. Markets may process continued bad news on housing as good news on rate hikes as it gives the Fed more reason to pause.
Data/Events Calendar Dec 26 – 30
Tuesday: US House Price Index MoM, Bank of Japan (BOJ) Summary of Opinions
Wednesday: US Pending Home Sales YoY, US MBA Mortgage Applications
Thursday: US Initial Jobless Claims
Friday: China NBS Manufacturing PMI
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FX Rates
Last Week's RangeRates are not real time. Rates are today's indicative mid-market rates as of time of publishing, which may vary. Please contact SVB for a current quote.
EUR/USD 1.06-1.07 GBP/USD 1.2-1.22 USD/CAD 1.36-1.37 AUD/USD 0.66-0.68 USD/JPY 130.6-137.5 USD/CNH 6.96-7.02 USD/ILS 3.43-3.51 USD/MXN 19.3-19.9 USD/CHF 0.92-0.93 USD/INR 82.6-82.9 USD/BRL 5.12-5.34 USD/SGD 1.35-1.36 USD/DKK 6.98-7.03 USD/SEK 10.3-10.5 USD/NOK 9.7-10
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USD
US Federal Reserve
Market bias: Less hawkish- The disappointing housing data from last week put downward pressure on the USD. Housing Starts and Building Permits declined by 0.5% and 11.2%, respectively. This data overweighted the positive impacts from the November CB's Consumer Confidence, which rose to 7.2% from 6.9% in October.
- The terminal rate projected by Fed Fund futures is 4.9% (see table below). Although close to a pause, expectations are building for rates to remain elevated for longer.
- Risk to current market bias: If inflation continues to inch lower, the Fed may need to remain hawkish, potentially raising the terminal rate beyond 5%.
GBPUK pound (GBP)
Market Bias: Bearish- The UK economy shrank, and the GDP contracted by 0.3% to 1.9% in Q3. This data missed the market expectation of 2.4%. The economy has been hit by surging energy prices and high inflation. The UK has the worst growth among the G7 countries, according to the Office for National Statistics (ONS).
- Government support on energy bills for homes and businesses and high interest payments pushed the UK government to borrow £22bn in November, a record high for a month. The increasing budget deficit could further weaken GBP.
- Risk to current market bias: The UK economy is poised to continue underperforming, and no Bank of England speaker is scheduled until the first week of January. The pound may strengthen on general USD weakness.
EUREuro (EUR)
Market Bias: Bullish- In addition to the 50bps rate hike this month, the European Central Bank (ECB) maintained a hawkish tone and stated that half-point hikes might soon become the “new norm” in the near term as there is no alternative to fight soaring inflation.
- Consumer sentiment surprisingly improved while entering the holiday season but was still far below the long-term average. Euro area Consumer Confidence Flash of December rose modestly. German Ifo Business Climate, which measures entrepreneurs’ sentiment about current and future business situations, improved.
- Risk to current market bias: The risk of a deeper recession persists and could potentially put a pause on the ECB rate hikes.
CADCanadian dollar (CAD)
Market Bias: Bearish- The Year-over-year (YoY) inflation rate in Canada eased to 6.8% in November compared with 6.9% in October – not cooling as rapidly as many would like. General price pressures remain high, especially housing costs, which accelerated due to rising mortgage interest costs and rent.
- Bank of Canada (BOC) rate hikes, which have kept pace with the Fed in 2022, have supported the currency, but this may be soon coming to an end. BOC stated that future hikes would be guided by economic data. Most economists think Canada will enter a technical recession at the beginning of 2023, and there are signs of a slowdown in other areas, including housing.
- Risk to current market bias: More aggressive rate hiking would result in CAD strengthening.
ASIA/PACIFICJapanese yen (JPY)
Market Bias: Bullish- The BOJ’s unexpected announcement to welcome higher bond yields is another example of central banks globally continuing to be vigilant about the strong USD and spiraling inflation.
- The expectation is that higher yields will attract capital back to Japan, propagating the JPY higher and cooling inflation in the process.
- As the world’s largest creditor, Japanese investors invested overseas will likely increase their hedging activity of assets back to JPY, resulting in further JPY strengthening.
- Risk to current market bias: The path for the JPY heavily depends on whether the BOJ starts a tighter monetary policy regime next year. If interest rate differentials versus other countries remain wide, downward pressure on the JPY should remain.
Chinese yuan (CNH/CNY)Market Bias: Bearish
- The Peoples' Bank of China (PBOC) keeps benchmark lending rates unchanged, but most economists see an increasing possibility of a cut on the 5-year rate to stimulate housing markets. Home prices in China have fallen for the 15th straight month.
- Capital outflows have been putting the exchange rate under downward pressure. Investors have sought to take advantage of the widening interest-rate differential between the US and China.
- Risk to current market bias: The PBOC responded to renminbi depreciation by injecting liquidity into the financial system, but they did not intervene in the FX market. If Chinese growth can rebound next year, net capital outflows would decrease or even reverse, providing support to the RMB.
Central Bank Policy Rate SummaryCurrent policy rate Rate when rate cycle began Terminal rate* Differential versus the USD US Fed 4.50 0.25 4.90 0.00 Eurozone ECB 2.50 -0.50 3.50 2.00 UK BOE 3.50 0.10 4.65 1.00 Canada BOC 4.25 0.25 4.50 0.25 Australia RBA 3.10 0.10 3.75 1.40 Japan BOJ -0.10 -0.10 0.30 4.60 China PBOC 3.65 3.85 0.85
*Source: Bloomberg World Interest Rate Probability
For more analysis on FX markets or information regarding SVB's FX services:
See all of SVB's latest FX information and commentary at www.svb.com/foreign-exchange-advisory
Source: Bloomberg | |
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