FX Weekly: Central Bank Policy Divergence Drives Currency Uncertainty

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

• 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.