FX Weekly: Economic data this week will set the tone for rate policy for 2023 and the USD

Market Bias: Mixed

• While December rate hike likely to be 50bps, February’s FOMC meeting still a coin toss for a 25 or 50bps hike.
• The unemployment rate is expected to stay at 3.7% for this Friday’s release. Previous signs of a cooling labor market have infiltrated markets these past few weeks. If unemployment is higher than expected, this could indicate fewer rate hikes in 2023. However, there have been several Fed comments that indicate an economic contraction may be necessary to truly reign in inflation.
• November FOMC minutes revealed a division in Fed sentiment. Fed doves were the majority last session, led by Lael Brainard, believing that a slowdown in rate hikes is necessary to fully realize the impact that previous rate hikes will have on the economy. Fed Chair Jerome Powell remained hawkish, stating there is still a ways to go in order to combat inflation. Powell’s sentiment is likely to be reiterated this week in his meeting with the Brookings Institution.
• Risk to current market bias: Strong data readings this week could indicate the need for more hikes, which would bolster the USD. Weak readings would likely have the opposite effect by showing inflation is already cooling, which would weaken the USD.

Market Bias: Bearish

• Inflation in the UK is hovering around 11%, more than 5 times the target level.
• In the past few weeks, the pound has strengthened mostly off the back of broader USD weakness. However, hawkish comments from the last Bank of England (BOE) meeting could keep the pound elevated.
• Deputy Governor Dave Ramsden said "However challenging the short term consequences might be for the UK economy, the MPC must take the necessary steps in terms of monetary policy to return inflation to achieve the 2% target sustainably in the medium term”.
• Despite hawkish comments out of BOE meetings, the overall economic outlook for the UK is bleak. The revised budget announced a few weeks ago, which cuts fiscal spending and increases taxes, puts a damper on potential growth and could pave the way for a future recession.
• Risk to current market bias: Any strong economic data out of the UK that indicates inflation is still far away from target could lead to more monetary policy measures to combat inflation, which would strengthen the pound.

Market Bias: Bearish

• Inflation in the Eurozone is hovering around 8-10%. Like the US, a 50bps rate hike is largely priced into the December European Central Bank (ECB) meeting.
• Unlike the Fed, the ECB has doubled down on a hawkish stance at the last meeting. ECB Executive board member Isabel Schnabel said “Incoming data so far suggests that the room for slowing down the pace of interest rates adjustments remains limited, even as we are approaching estimates of the ‘neutral’ rate.”
• CPI readings across the Eurozone this week will indicate just how much room the ECB has to further raise rates.
• Potential economic growth continues to be vulnerable to the ongoing European energy crisis
• Risk to current market bias: Weak CPI readings this week may indicate that inflation still far off from target, making the case for more aggressive rate hikes, strengthening the EUR.

Market Bias: Bearish

• A rise in oil prices last week caused the loonie to weaken. As a commodity currency, CAD remains vulnerable to rising oil prices, especially amidst the European energy crisis and global recessionary fears, and now the protests in China.
• Economic data for Canada this week include the unemployment rate, which is expected to increase by 0.1%, and GDP data, which is expected to decrease compared to prior readings.
• It is still a coin toss whether the Bank of Canada (BOC) will raise rates by 25bps or 50bps at their next meeting on Dec 7.
• Risk to current market bias: A dip in oil prices, an end to the China protests, and aggressive rate hiking could all cause CAD to strengthen.

CNH/CNY

Market Bias: Bearish

• Protests in China over COVID restrictions brought uncertainty to the market. The protest could cause supply chain slowdowns, weakening the CNH, or cause President Xi to reopen the country faster, which would be positive for growth and the CNH.
• Last week both the onshore and offshore yuan declined after the Peoples’ Bank of China (PBOC) reduced the reverse requirement ratio by 25bps.This can be seen as an effort to encourage economic growth despite a surge in COVID cases and related restrictions.
• Manufacturing data coming out this week is forecasted to show a contraction, which would add to the pressure for the PBOC to enact more growth-related monetary policies.
• Risk to current market bias: The protests end and Xi reopens the economy, strengthening the yuan.

JPY

Market Bias: Bearish

• Tokyo’s inflation data from last week show highest level of inflation since 1982. Despite this, Bank of Japan (BOJ) Governor Kuroda believes the current cost-push inflation is only temporary and eventually price growth will become sustainable.
• Risk to current market bias: Japan has kept rates steady at 0.10%. Kuroda’s departure in April 2023 is likely necessary in order to see any rate increases, which would bolster JPY.