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    • Foreign Exchange Advisory
    • FX Update

    FX Weekly: Risk-on tone continues as Fed pause nears while USD shows continued softness

    Chandler White Headshot
    Chandler White
    • January 17, 2023

    This will be the last edition of the FX Weekly. We are refocusing our efforts on our other publications including FX Risk Advisories, FX Quarterly, and the FX Navigator. Please contact your FX salesperson if you need help with finding rates or other information that was found in the Weekly. We encourage you to review all of our FX content available here in the FX Advisory section of svb.com.

    • Global inflation begins to cool as G7 countries see signs of inflationary slowdown after rate hikes.
    • China reopening represents an opportunity for global growth to ramp-up and currencies to strengthen, particularly commodity currencies. This might be prioritized by China after a poor growth outlook over the weekend and evidence of population decline. 
    • Corporate earnings releases this week will be critical in determining how much interest rate hikes have dampened corporate growth.

    Key data/events for January 17 - 20, 2023 

    Tuesday: Empire Manufacturing, Canada Consumer Price Index  year over year (CPI YoY)

    Wednesday: Retail Sales Advance month over month (MoM), MBA Mortgage Applications, Industrial Production MoM, Producer Price Index (PPI) Final Demand MoM, Eurozone and UK CPI YoY

    Thursday: Initial Jobless Claims, Housing Starts, Japan CPI YoY

    Friday: Existing Home Sales

       

     

    • 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/USD1.06-1.09
      GBP/USD1.21-1.22
      USD/CAD1.33-1.35
      AUD/USD0.69-0.7
      USD/JPY127.5-132.9
      USD/CNH6.71-6.83
      USD/ILS3.4-3.51
      USD/MXN18.7-19.2
      USD/CHF0.92-0.94
      USD/INR81.3-82.4
      USD/BRL5.07-5.31
      USD/SGD1.32-1.34
      USD/DKK6.84-6.99
      USD/SEK10.4-10.5
      USD/NOK9.8-10.1

    • USD

      Market Bias: Bearish

      • Last week’s US CPI data for both MoM and YoY came in right as expected, indicating a deceleration in prices as inflation pressures slow. The dollar sold off in response.
      • Hawkish comments out of the Fed – Bullard, Barkin, and Harker all made comments that favored increasing rates beyond 5%.
      • This week’s data on housing and unemployment claims are expected to show slight declines, while manufacturing is predicted to improve. Strong data readings could cause another risk rally as seen after CPI releases, which could push the USD lower.
      • Risk to current market bias: Unexpected weak data readings this week could surprise markets and trigger a risk-off sentiment, which would strengthen the USD. An increase in Fed hawkishness or poor corporate earnings could have the same effect.
      GBP

      Market Bias: Bullish

      • Bank of England’s (BOE) Catherine Mann made several hawkish comments last week, indicating that the BOE will continue to raise rates despite recession risk and prioritize bringing inflation down to its target rate of 2%.
      • CPI YoY this week is expected to decrease nominally, from 10.7% prior to 10.6%. A reading in-line with expectations or better could give even more support to the BOE to continue raising rates, which would strengthen the pound.  
      • The UK is facing the added challenge of an aging population, thus contributing to lower productivity compared to their G7 peers. This will be an added headwind to economic growth on top of the BOE’s consensus to aggressively hike rates further.
      • Risk to current market bias: A shift in BOE priorities from the 2% inflation target to other measures, such as supporting the labor market or economic output, would likely weaken GBP.
      EUR

      Market Bias: Bullish

      • The European Central Bank (ECB), which has taken a dovish approach to inflation until recently, has turned hawkish. Like the BOE, bringing inflation down to target is a top priority.
      • Unusually warm winter weather has been a saving grace amidst the energy crisis, as natural gas prices have decreased due to lower demand.
      • Bolstering ECB hawkishness is consumer sentiment around inflation, which has largely receded back to the long-term norm despite high prices, according to an ECB survey.
      • The EUR in particular has seen steady gains against the USD post-CPI reading, now at the strongest level since last April.
      • Risk to current market bias: A shift in ECB sentiment which deprioritizes bringing inflation down would likely weaken EUR.
      CAD

      Market Bias: Bullish

      • Like most currencies, CAD has strengthened recently vs. the US dollar.  Mostly due to the US CPI reading but also due to a rally in commodity prices and the expectation of 25bps rate hike by Bank of Canada on Jan 25. This could be the last hike before Canada reaches their target interest rate.
      • Canada CPI reading this week is the last big data point before the Jan 25 BOC meeting, and it has been trending downward since June.
      • Risk to current market bias: Weak economic data around employment or the housing market could cause a shift in BOC sentiment and lead to a pause in rate hikes, which would weaken CAD.
      ASIA/PACIFIC

      JPY     
      Market Bias: Bullish

      • The BOJ has finally taken a hawkish turn. After not taking any significant measures to combat inflation, Yomiuri news reported that the BOJ will inspect the side effects of loose monetary policy and may consider adjusting their bond purchase program next week.
      • BOJ is expected to raise rates by 50bps in March – this has potential for investors to flock back to JPY investments and cause significant strength to the currency. JPY has already strengthened 17% vs. USD since October.
      • Risk to current market bias: The BOJ is expected to pivot when Kuroda departs in April, although with much uncertainty around what exactly the pivot entails. If it is less hawkish than expected, a weakening of JPY is possible.

       

      Performance relative to common FX Budget Rates:
        Average Rate for 2021 Current Spot    Current Spot vs 2021 Average
      AUD 0.75 0.70 -7.0%
      CAD 1.25 1.34 -6.7%
      CHF 0.91 0.92 -0.7%
      CNH 6.45 6.77 -5.0%
      EUR 1.18 1.08 -8.7%
      GBP 1.38 1.23 -10.8%
      JPY 110 128 -16.6%
    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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     Source: Bloomberg
     

    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.

    Chandler White
    WRITTEN BY
    Chandler White
    Chandler White is a foreign exchange (FX) advisor for Silicon Valley Bank on the corporate team, based in Los Angeles, California
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