FX Weekly: Hawkish Fed comments support further rates increases

Federal Reserve: Hawkish

• US Treasuries slumped and stock prices declined last week as traders adjust their expectations to the Fed indicating it will continue to raise rates to tackle inflation
• Hawkish speeches from several Fed Reserve policymakers dashed hopes of a pause in tightening cycle
• Initial US Jobless Claims unexpectedly decline in week ending Nov 12; labor market is bracing for possible increased jobless claims heading into end of 2022 as companies forecast difficult times ahead
• 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

• Last week the UK outlined GBP55B in tax increases and spending cuts, furthering negative sentiment about the near-term economy, imposing further pain on consumers and businesses, and hurting the outlook for GBP
• UK bond market under pressure as anticipation of record debt coming due next year
• Moody's anticipates government debt will remain about 100% of GDP in coming years

• Risk to current market bias: British pound often tracks closely with the euro so any lift to the euro could have a strong positive knock-on effect with GBP

• European Central Bank (ECB) indicates probability of a recession is 80% putting pressure on long euro positions
• Eurozone Gross Domestic Product (GDP) grew by 0.2% in Q3 over prior quarter – this follows a 0.7% growth in Q2 – representing very weak growth and signaling a possible contraction in Q4
• With US signs of inflation possibly cooling, a selloff of USD vs EUR has taken place, but investors are pressed to believe this is long lasting
• Eurozone CPI eased to 10.6% from 10.7% expected and ECB officials seem to be leaning towards slower pace of +50bps hike at the 15 Dec  meeting.
• Risk to current market bias: Any indication the Eurozone economy is stronger than expected and inflation is softening. Also, any real prospect of peace in Ukraine.

• The loonie continues to follow the global market trends in the absence of domestic data
• Oil prices fell 12% since last Monday and CAD slipped only 1% vs. the US dollar suggesting investors believe the price of oil will stabilize
• Bank of Canada meets 12/7 and a 25bps hike to 4.0% is expected
• 30% of Canadians surveyed said they would be reducing their holiday spending ‘substantially’ as inflation remains high
• Risk to current market bias: Global recession puts significantly more downward pressure on commodity prices and CAD

JPY (Japanese yen)

Market Bias: Bearish

• 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
• Less than 50% chance that BOJ will make an explicit rate hike in 2023 due to a bleak economic outlook
• Government puts no pressure on BOJ to rate hike as they prefer low interest rates to finance government debt
• 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

• Chinese renminbi gave back some of prior week gains after mixed messages on Zero-COVID restrictions confused investors
• China’s exporters slowed conversion of foreign currency proceeds last month, weakening support for the yuan amid growth headwinds
• A net deficit of $730MM was recorded last month in currency deals related to goods trading; the biggest since Feb 2016 – this in contrast to a trading surplus the prior month, suggesting a bearish outlook for yuan as dollars become the preferred currency to hold
• Risk to current market bias: Pivot away from the restrictive COVID prevention measures and/or a reduced Fed rate hike path