- The Fed’s 0.75% hike to 4.00%, and overall hawkish stance should continue to support the dollar. While the labor market remains tight, there is mounting evidence of a slowing economy, reinforcing the continuation of monetary policy.
- Bank of England raised benchmark rate by 0.75% to 3.00% as expected. However, dovish statements regarding future rate increases prompted a quick selloff of the British pound.
- While US October Nonfarm Payrolls beat expectations, it still shows a longer-term downward trend and when combined with other data shows a general US economic slowdown is occurring.
- With nuanced economic challenges, global central banks are charting unique monetary policy paths increasing uncertainty of currency valuations.
- In Focus this week: A good amount of global economic data including inflation data and production data.
Data/Events Calendar 11/7 – 11/11
Tuesday (8th): US midterm elections, Japan Current Account Balance, China Consumer Price Index (CPI)
Wednesday (9th): US MBA Mortgage Applications, Wholesale Inventories
Thursday (10th): US Initial Jobless Claims, US CPI, UK Gross Domestic Product (GDP), UK Industrial and Manuf. Production, Japan Producer Price Index (PPI), German CPI
Friday (11th): University of Michigan Sentiment
Last Week's Range
EUR/USD 0.97-1 GBP/USD 1.12-1.16 USD/CAD 1.35-1.38 AUD/USD 0.63-0.65 USD/JPY 145.68-148.85 USD/CNH 7.17-7.36 USD/ILS 3.51-3.58 USD/MXN 19.46-19.92 USD/CHF 0.99-1.01 USD/INR 82.33-82.93 USD/BRL 5.02-5.41 USD/SGD 1.4-1.42 USD/DKK 7.46-7.65 USD/SEK 10.89-11.24 USD/NOK 10.22-10.64
Market Bias: Bullish
- The Fed hiked interest rates by the expected 0.75% to 4.00%. Fed Chair Jerome Powell indicated that the pace of hikes could slow but that rates could also peak higher as the job market remains tight.
- Both Fed officials, Barkin and Collins, came out with hawkish statements since the Federal Open Market Committee (FOMC) meeting – indicating that we can’t rule out another 0.75% hike in December and that rates may need to exceed the terminal rate of 5%.
- US Purchasing Managers Index (PMI) showed slowing business growth as companies are faced with economic uncertainty.
- Mixed job report with the US October Nonfarm Payrolls increasing 261k and followed an upwardly revised 315k gain in September, however evidence is showing a longer-term trend of slowing employment growth.
- The unemployment rate ticked slightly higher dampening the more positive payroll data.
- Risk to current market bias: A loosening labor market with a continued slowing economy will give the Fed room to dial down future rate hikes.
Market Bias: Bearish
- Bank of England voted 7-2 to raise its benchmark rate by 0.75% to 3.00%, the biggest rate increase in 33 years, however, it was considered a ‘dovish hike’ as the central bank lowered expectations for future rate hikes. On the back of the increase, the UK government bond curve steepened, and the pound fell.
- Bank of England expects inflation to peak at 10.9% in the upcoming months then fall to zero by 2025 – the market is perceiving this outlook as very optimistic with a good amount risk.
- In a move intended to begin unwinding the Quantitative-Easing (QE) program, the central bank sold 750M pounds worth of the UK government bonds from its QE portfolio, which stood at a staggering 900B at its peak.
- Risk to current market bias: Stabilized economic outlook with new fiscally sound economic plan on 17 November combined with signs of reduced global inflation.
Market Bias: Bearish
- Eurozone Consumer Price Index (CPI) rose 10.7% year-on-year (with core CPI at 5%), estimate was at 10.3%.
- Eurozone Gross Domestic Product (GDP) grew by 0.2% over the quarter – this follows a 0.7% growth in Q2 – representing very weak growth and signaling a pivot to contraction in Q4.
- German factory orders fell 4% from the prior month, a much steeper drop than estimated, as factories struggle with high inflation and sluggish demand.
- Eurozone Purchasing Managers Index (PMI) dropped down to 46.4 in October continues to show a downward trend as a bearish signal on the economic outlook for the region.
- Risk to current market bias: Energy and commodity prices soften relieving inflation pressure while Q4 economic growth surprises to the upside.
Market Bias: Mixed
- The Canadian economy added 108K jobs in October, 10x the forecast, with hours worked up 0.7% and average hourly wages up 5.6% annually. However, unemployment rate remained steady at 5.2%.
- Canadian Manuf. Purchasing Managers Index (PMI) dropped to 48.8 in October from 49.8 in September continuing its downward trend and signaling economic contraction.
- Rumors China could transition away from their zero-COVID policy is supporting commodity prices helping to strengthen the Canadian dollar.
- Risk to current market bias: Global recession risks and economic contraction put downward pressure on the commodity prices.
JPY (Japanese yen)
Market Bias: Bearish
- The Jibun Bank Japan Composite Purchasing Managers Index (PMI) rose to 51.8 for October compared with 51.0 in September, the highest since the June reading driven by a stronger service sector, helped by the roll-out of the Nationwide Travel Discount Program and recent COVID restriction lifting.
- High input costs especially raw materials, energy, and fuel, continue to create headwinds for the manufacturing sector and upward pricing pressure.
- Bank of Japan Governor Haruhiko Kuroda indicated a possible adjustment in their yield curve control policy “if the achievement of our 2% inflation target comes into sight.”
- The yen remains under pressure from a widening policy divergence from the Fed and other central banks – a continued depreciating currency remains a top concern as it raises prices on imported goods.
- Risk to current market bias: The JPY may return to being a safe-haven currency, especially with the central bank intervening directly in FX markets to protect the JPY.
CHN/CNY (Chinese yuan)
Market Bias: Bearish
Performance relative to common FX Budget Rate:
- China services activity, measured by the Caixin China General Services Purchasing Managers Index (PMI), dropped for second consecutive month, to 48.4 in October from 49.3 in September.
- While the Caixin China General Manufacturing PMI rose to 49.2 in October 2022 from September's 48.1, a slight improvement but still representing a downward trend in factory activity.
- Risk to current market bias: Pivot away from the restrictive COVID prevention measures and reduced Fed rate hike path.
Average Rate for 2021 Current Spot Current Spot vs 2021 Average AUD 0.7513 0.6471 -13.9% CAD 1.2537 1.3505 -7.7% CHF 0.9143 0.9901 -8.3% CNH 6.4506 7.228 -12.1% EUR 1.1828 0.9996 -15.5% GBP 1.3757 1.1461 -16.7% JPY 109.85 146.41 -33.3%
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