FX Weekly: Aggressive tightening by the Fed is having impact on the economy

Market Bias: Fed Hawkish

• Speculations that Fed may stop the aggressive tightening as mortgage applications declined by 1.7% and September Good Trade Balance posted a deficit of $92.2B, yet the better than expected GDP numbers may convince the Fed to keep the 75bps rate hike in place.
• Markets selling the dollar as US bond yields keeps giving up ground and stocks extend their gains.
• Wholesale Inventories rose and new home sales declined by 10.9% in September.
• Fed is likely to view the weaker components due to the tightening of monetary policy, but not the reason to back off.
• Risk to current market bias: While the Fed is still set to raise interest rates next week, the slowdown is adding to the growing narrative that it may be approaching the end of its aggressive tightening.

Market Bias: Bullish

• Last week GBP rallied above 1.16 due to the confidence in UK’s new PM Rishi Sunak.
• Sunak may delay the announcement of a fiscal plan on October 31, to mid-November.
• Wages fell at the sharpest pace since 2010 and adding pressure on the central bank to rein in price increases.
• Risk to current market bias: Gilts continue to slide, and BoE is less hawkish to rate increase.

Market Bias: Bearish

• EUR surpassed parity with the dollar to hit five-week high.
• ECB raised rate by 75bps and commented that future rate hike decisions  will be on a meeting-by-meeting basis.
• Just like the Fed, ECB fighting inflation aggressively, but worried about recession.
• Germany’s consumer prices jumped 11.6% in October from a year earlier.
• Potential slower rate hikes after Canada’s less hawkish rate hike.
• Risk to current market bias: Lower than expected consumer prices and higher than expected inflation could lower the EUR including a less hawkish ECB.

Market Bias: Bearish

• BoC delivered less than expected 50bps rate hike, risking downward pressure on the currency and easing financial conditions.
• Recession fears are looming as BoC pivoted to a less hawkish rate hike.
• OPEC seems to want the price of oil to be around $100/bb, and supply may be tightened to keep oil at this price helping the loonie with some resilience against the USD.
• Risk to current market bias: Less hawkish Fed rate hikes and tightening on oil supply could help CAD become more bullish.

CHN/CNY

Market Bias: Bearish

• Widening yield gap with the US is already weakening the currency.
• PBOC’s next move is likely to be a rate cut in Q1 2023.
• Lock downs due to COVID are still lingering in China, most recently in a central district of Wuhan.
• Risk to current market bias: Fed slows down rate hike, and COVID lockdowns are in the rear mirror.

JPY

Market Bias: Bearish

• Japan’s interest rate will likely be left at -0.1%, despite inflation standing at 3% YoY
• Current monetary policy was put in place until inflation reached a 2% target. Japan has experienced 3% inflation since August 2022.
• Risk to current market bias: Inflation drops, and BoJ keeps intervening by buying bonds.