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    • Foreign Exchange Advisory
    • FX Update

    FX Weekly: Central Bank Policy Divergence Drives Currency Uncertainty

    Nicholas Farguson Headshot
    Nicholas Farguson
    • November 7, 2022
    • 3 min read
    • 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

    • FX Rates
      Last Week's Range

      Rates 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/USD0.97-1
      GBP/USD1.12-1.16
      USD/CAD1.35-1.38
      AUD/USD0.63-0.65
      USD/JPY145.68-148.85
      USD/CNH7.17-7.36
      USD/ILS3.51-3.58
      USD/MXN19.46-19.92
      USD/CHF0.99-1.01
      USD/INR82.33-82.93
      USD/BRL5.02-5.41
      USD/SGD1.4-1.42
      USD/DKK7.46-7.65
      USD/SEK10.89-11.24
      USD/NOK10.22-10.64

    • USD

      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.
      GBP

      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.
      EUR

      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.
      CAD

      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.
      ASIA/PACIFIC

      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

      • 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.
      Performance relative to common FX Budget Rate:

        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%
    Contact Us

    For more analysis on FX markets or information regarding SVB's FX services:

    Contact your respective SVB FX Advisor or the SVB FX Advisory Team at GroupFXRiskAdvisory@svb.com.
    See all of SVB's latest FX information and commentary at www.svb.com/foreign-exchange-advisory

    Subscribe to receive FX updates to your inbox.


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    This article is intended for U.S. audiences only.

    ©2023 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB). SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license.

    The views expressed in this email are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.

    Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal, accounting and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.

    Nicholas Farguson
    WRITTEN BY
    Nicholas Farguson
    Nick Farguson is a foreign exchange (FX) advisor for Silicon Valley Bank, focused on supporting growth-stage software companies in the San Francisco Bay Area.
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