Daily Market Outlook by Kate Curtis from Trader's Way

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Forex Major Currencies Outlook (Oct 10 – Oct 14)

Inflation data from the US will be the most important data point in the coming week that will also have consumption from the US, employment from the UK as well as inflation and trade data from China.​

USD

September ISM manufacturing PMI report printed another decline as it came in at 50.9 vs 52.5 as expected and 52.8 the previous month. Employment and new orders components dropped into contraction territory while new export orders slipped deeper into contraction. On the positive side, prices paid index slid to 51.7 from 52.5 the previous month continuing to show that inflation pressures are dissipating.

ISM Non-manufacturing in September came in at 56.7 vs 56.9 in August but still a very strong reading. Prices paid and supplier deliveries indexes dropped indicating that price pressures are declining and supply chains are improving. Employment printed a healthy 53 vs 50.2 in August thus showing the highest reading since March. New orders have slightly declined but are still above 60 and inventories continue to fall signalling positive input for new orders in the future. Exports have increased showing a healthy foreign demand for the US services.

NFP for the month of September printed yet another strong report. The headline number printed 263k vs 250k as expected. The unemployment rate dropped to 3.5%, record low, from 3.7% in August. Participation rate ticked down to 62.3% from 62.4% the previous month. U6 rate also dropped from 7% the previous month to 6.7%. Average hourly wages came in at 0.3% m/m and 5% y/y. Leisure and hospitality added 83k jobs, education/health care 90k with professional and business services adding 46k. The report will add increase the probability of a 75bp rate hike at November meeting. JOLTS job openings report for August came in at 10.053m, down from 10.775m in July. This marks the biggest monthly fall in history or this reading (740k).

The yield on a 10y Treasury started the week at 3.8% dropped during the week to as low as 3.56% then risen to 3.89% after NFP. The yield on a 2y Treasury started the week at 4.2% during the week. Spread between 2y and 10y Treasuries reached -48bp during the week. FedWatchTool sees the probability of a 50bp rate hike in November at 22.4% and probability of a 75bp rate hike at 77.6%.

This week we will have FOMC minutes from the latest Fed meeting, September inflation and consumption data.

Important news for USD:

Wednesday:

• FOMC Minutes

Thursday:

• CPI

Friday:

• Retail Sales

EUR

Final manufacturing PMI data for the Eurozone in the month of September came in at 48.4, a tick down from 48.5 as preliminary reported. Surging energy costs are wrecking havoc on manufacturing as both German and French reading printed below 48. Final services PMI came in at 48.8, down from 49.8 in August indicating that Eurozone is sinking deeper into contraction and almost inevitable recession. French reading represented a high point as it moved further into expansion territory, but German services printed abysmal 45. Composite came in at 48.1 vs 48.9 in August.

GBP

Final manufacturing PMI data for the month of September came in at 48.4 vs 48.5 as preliminary reported. Declining foreign demand combined with surging energy costs is weighing on manufacturing activity. A small positive is that the reading improved from August low of 47.3. Final services reading printed exactly 50, right on the border between expansion and contraction. Services PMI has been in expansion territory since February of 2021. Composite dipped further into contraction with 49.1 print.

This week we will have employment data.

Important news for GBP:

Tuesday:

• Claimant Count Change
• Unemployment Rate

AUD

RBA surprised the markets and slowed down the pace of their rate hikes. This week’s rate hike was 25bp while 50bp was a consensus. The cash rate is now at 2.6%. The board stated that cash rate has been increased substantially during the short period of time and that smaller rate increase will help achieve more balance between supply and demand. The statement showed “the Bank’s central forecast is for CPI inflation to be around 7¾ per cent over 2022, a little above 4 per cent over 2023 and around 3 per cent over 2024.” and board is committed to bringing inflation back into 2-3% target range. Future rate hikes are expected and board will continue to pay attention to labour market and inflation when making further decisions.

This week we will have inflation and trade data for the month of September.

Important news for AUD:

Friday:

• CPI (China)
• Trade Balance (China)

NZD

RBNZ delivered yet another 50bp rate hike as expected and lifted the official cash rate to 3.5%. Members of the Committee agreed that additional tightening of monetary conditions is needed in order to bring inflation back into targeted range of 1-3%. There was a debate whether to hike by 75bp or 50bp and members agreed that going with a 50bp rate hike is the proper way. Members acknowledged that recent falls in oil prices led to headline inflation slowing down in may developed economies, however core inflation numbers still remain high. Labor shortages are keeping production constrained and lead to higher wage pressures. First dairy auction of October printed a decline in price of -3.5%, a fall after two consecutive auctions of rising prices.

CAD

After three employment reports showing drops in employment the September reading printed an increase of 21k jobs. The unemployment rate dropped to 5.2% from 5.4% in August. Participation rate ticked down to 64.7% from 64.8% the previous month. Full-time employment came in at 5.7k while part-time employment contributed with 15.4k jobs. Wages slid to 5.2% y/y but it is a fourth consecutive month of prints above 5%. The report confirms governor Macklem’s statement that labor market remains very tight.

JPY

Inflation data for the Tokyo area in the month of September showed headline number tick down to 2.8% y/y from 2.9% y/y in August, however core measures showed higher readings compared to previous months’. Ex fresh food category came in at 2.9% y/y vs 2.6% y/y while ex fresh food, energy rose 1.7% y/y vs 1.4% y/y in August. Although increases in inflation are a welcome sign for BOJ they will not be inclined to act and hike rates at the November meeting.

Final services PMI reading for September saw it return to expansion with 52.2 reading, up from 49.5 the previous month. Composite was also lifted back into expansion with 51 vs 49.4 in August. The report shows announcement that foreign restrictions on tourism will be lifted in October as main catalyst for optimism across the services sector.

CHF

SNB total sight deposits for the week ending September 30 showed a huge decline. They came in at CHF669.6bn vs CHF747.1bn the previous week. The decline of CHF77.5bn indicates that SNB was forced to sell EUR and USD as depositors were removing funds from banks. September inflation numbers showed headline inflation unchanged from August at 3.5% y/y as expected with core staying unchanged for the third straight month at 2% y/y.

 

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Forex Major Currencies Outlook (Oct 17 – Oct 21)

This week we will have inflation data from UK, New Zealand, Japan and Canada, employment data from Australia as well as Q3 GDP, production and consumption data from China. Additionally, 20th National Congress of the Communist Party of China will be held throughout the week and great number of companies will report their Q3 earnings.​

USD

IMF released new projections for 2023 and it sees global GDP down to 2.7% from 2.9% in July. US GDP is unchanged at 1%, however Eurozone has been downgraded to 0.5% vs 1.2% y/y in July. The message of the report was “the worst is yet to come”. IMF chief economist stated that central bank fight against inflation will continue through 2024 as he does not see inflation coming to target in 2023. He added that the unemployment rate in the US will rise 2pp over 2024 and 2024. Minutes from the latest FOMC meeting reiterated bank’s hawkish stance.

CPI report for September showed headline number tick down to 8.2% y/y from 8.3% y/y previous month, but higher than 8.1% y/y as expected by the markets. Core CPI printed 6.6%, a highest reading in the last 40 years. On a monthly basis, headline came in at 0.4% m/m vs 0.2% m/m as expected while core came in at 0.6% m/m vs 0.4% m/m as expected. Housing costs, medical costs, food and airline fares were pushing inflation up while falling gasoline prices dragged inflation down. The report makes a 75np rate hike in November a certainty with a probability of a 100bp rate hike creeping in.

The yield on a 10y Treasury started the week at 3.89%, it crossed 4% during the week and finished the week at around 3.9%. The yield on 2y Treasury rose to 4.5%, the highest level since 2007. Spread between 2y and 10y Treasuries started the week at -42bp and widened to -52bp. FedWatchTool after the CPI report does not see the probability of a 50bp rate hike in November, probability of a 75bp rate hike is at 97.4%. while a probability of a full 100bp rate hike is at 2.6%.

EUR

ECB members have been presenting cases for both 50bp and 75bp rate hikes throughout the week with ECB Vice President de Guindos stating that it is very difficult to determine the level of the terminal rate adding that bank is data dependent when it comes to the further moves. Trade balance continued to deteriorate and in August it came in at -€50.9bn vs -€34bn in July. Exports were up 24% y/y, however imports were up 53.6% y/y. Energy imports year-to-date rose astonishing 154% illustrating the magnitude of European energy crisis.

GBP

Employment report showed some mixed numbers. Claimant count risen to 25.6k from 6.3k in August. Employment change in last three months dropped -109k. However, the unemployment rate for the month of August ticked down to 3.5%. Additionally, average weekly earnings including bonus rose 6% 3m/y. Labor shortages are increasing as number of people that are classified as long-term sick and out of the jobs market rose by little less than 170k in the past three months.

BOE Governor Bailey sent a message to pension funds stating “you have three days left to get this done” and added that BOE will be out of the market “by the end of the week”. These statements mean that BOE is no longer planning on buying Gilts as an emergency liquidity program and it has sent GBP tumbling for more than 200 pips against USD. The pound had a huge rebound on Wednesday and Thursday as markets were pricing in a turnaround of Prime Minister Liz Truss tax cuts plans. Kwasi Kwarteng has been sacked from the position on Chancellor of Exchequer and in his place Jeremy Hunt has been appointed.

This week we will have inflation data.

Important news for GBP:

Wednesday:

• CPI

AUD

RBA Assistant Governor Ellis confirmed that neutral nominal rate is at least 2.5% adding that neutral real rates should ne in positive territory, although they may be low.

Headline inflation from China in the month of September printed 2.8% y/y as expected and up from 2.5% y/y in August. Food inflation was up 8.8% y/y and it was the main contributor to the reading. CPI is still within PBOC’s target range so they may continue with easing if the need arises. PPI, on the other hand, continued to decline and printed a 0.9% y/y reading, down from 2.3% the previous month and making it declining for eleventh consecutive month.

20th National Congress of the Communist Party of China starts on October 16. It will last for about one week and we will get more information whether there will be change in zero-Covid policy, although chances for it are low.

This week we will have employment data from Australia as well as trade, Q3 GDP, production and consumption data from China.

Important news for AUD:

Tuesday:

• GDP (China)
• Industrial Production (China)
• Retail Sales (China)

Thursday:mployment Change

• Unemployment Rate

NZD

RBNZ has released annual report for the period 2021-2022 in which Governor Orr states that the bank remains committed to supporting economic recovery through the COVID-19 pandemic. He added that the bank needs to continue with fighting inflation as further progress is needed on that field.

This week we will have inflation data for Q3.

Important news for NZD:

Monday:

• CPI

CAD

Final manufacturing sales reading for the month of August came in at -2% m/m vs -1.8% m/m as preliminary reported. This marks a fourth consecutive drop in manufacturing sales as manufacturing sector in Canada goes through a slowdown due to drop in demand. The sales were lower in 17 of 21 industries led by petroleum and coal as well as chemicals -4.5%. Wholesale trade fared much better as it came in at 1.4% m/m vs 0.8% m/m as preliminary reported and up from -0.6% m/m the previous month.

This week we will have inflation data.

Important news for CAD:

Wednesday:

• CPI

JPY

Core machinery orders for the month of August dropped -5.8% m/m vs -2.3% m/m as expected. The drop comes after two consecutive months of increases with July printing 5.3% m/m. The report shows fall in non-manufacturing orders as biggest cause for the drop in headline reading. USDJPY rose over the 146 level in the aftermath of this news and crossed the 147 level after US CPI report. On Friday the pair has crossed the 147.75 level which was a high from 1998 and almost reached the 149 level.

CHF

SNB total sight deposits for the week ending October 7 came in at CHF639.3bn vs CHF669.6bn the previous week. Another big drop in sight deposits (-30.3bn) as investors move away funds from SNB thus forcing it to sell EUR and USD.

 

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Forex Major Currencies Outlook (Oct 24 – Oct 28)

ECB, BOC and BOJ meetings will take the centre stage followed by preliminary Q3 GDP data from the US and preliminary October PMI data from Eurozone and the UK.​

USD

Housing data showed building permits rise to 1564k from 1542k the previous month while housing starts declined significantly to 1439k from 1566k in August. Existing home sales continued to decline since February of this year and came in at 4710k vs 4780k the previous month. With mortgage rates rising over 7% housing data can only get uglier as we proceed with rate hikes.

The yield on a 10y Treasury started the week at around 4%, crossed the 4% level during the week and finished the week at around 4.27%. The yield on 2y Treasury reached 4.64% during the week and then dropped bellow 4.5% on Fed’s signalling that it will stop at 5%. Spread between 2y and 10y Treasuries started the week at -52bp and tightened to -27bp. FedWatchTool sees the probability of a 50bp rate hike in November at 3.5% with a probability of a 75bp rate hike at 96.5%.

This week we will have a preliminary Q3 GDP reading as well as PCE inflation data. Atlanta Fed model sees Q3 GDP at around 3%.

Important news for USD:

Thursday:

• GDP

Friday:

• PCE

EUR

ECB member Villeroy de Galhau stated in an interview that further tightening may slow down once the deposit rate gets to 2%. Markets are currently pricing terminal rate at around 3%. He also added that QT (Quantitative Tightening) may start around end of the year. Previous reports have suggested that QT will start somewhere in the 2023.

This week we will have ECB meeting and preliminary PMI data for the month of October. Markets are pricing almost a 90% probability of a 75bp rate hike as hawks dominate.

Important news for EUR:

Monday:

• S&P Global Manufacturing PMI (EU, Germany, France)
• S&P Global Services PMI (EU, Germany, France)
• S&P Global Composite PMI (EU, Germany, France)

Thursday:

• ECB Interest Rate Decision

GBP

Over the weekend BOE Governor Bailey came out with a statement suggesting that the next interest rate hike could be larger than what markets are expecting. He named high inflation as the main reason for stronger reaction than in August. GBPUSD gapped up on the market open and then proceed toward the 1.13 level.

Inflation in September returned into double digits and printed 10.1% y/y, up from 9.9% y/y in August. Core inflation continued to rise and printed 6.5% y/y, up from 6.3% y/y the previous month. Housing and housing services saw the biggest price increases followed by food and non-alcoholic beverages. BOE will continue its rate hike path in order to contain the inflation which is shattering people’s standard of living. A 75bp rate hike still seems to be the expected outcome, however possibility of a full 100bp rate hike is slowly creeping in.

Newly appointed Chancellor of Exchequer Jeremy Hunt stated that government will backtrack on most of the tax measures announced on September 23. He added that cap on energy prices will last until April of 2023. Prime Minister Truss was under a lot of pressure from within her own party especially after the backtracking on tax cuts, which was the platform she campaigned on. She announced her intent to resign but will remain in place of Prime Minister until new leader is chosen. A new leader should be elected by the end of the month. Former Chancellor of Exchequer who came in second to Truss in previous leadership vote, Rishi Sunak, is the biggest favourite for the new Prime Minister spot according to the polls.

This week we will have preliminary PMI data for the month of October.

Important news for GBP:

Monday:

• S&P Global Manufacturing PMI
• S&P Global Services PMI
• S&P Global Composite PMI

AUD

RBA meeting minutes from the October meeting characterized decision for a 25bp rate hike as “finely balanced”. They also showed that rates are not "especially high" and that further increases in rates are likely in the coming meetings. Employment report for the month of September showed employment change of just 0.9k vs 25k as expected. The unemployment rate and participation rate remained unchanged at 3.5% and 66.6% respectively. Full-time employment was a bright spot in report as it showed an increase of 13.3k.

Advancement of technology was the main point stated at the 20th Party Congress. Technology was characterized as vital to economic development. The statement shows focus on high-quality education as well as self-sufficiency regarding technology. There will be no changes to the zero-Covid policy.

This week we will have Q3 inflation data. Chinese GDP data was delayed indefinitely so we may get them during the week.

Important news for AUD:

Wednesday:

• CPI

NZD

Q3 inflation data came in hotter than expected with 2.2% q/q and 7.2% y/y vs 1.6% q/q and 6.6% y/y as expected. RBNZ published it’s own inflation data and showed increase to 5.4% y/y from 5.2% y/y previously. The bank will continue increasing rates to fight the red hot inflation with many analysts now seeing a 75bp rate hike at November meeting. Global Dairy Prices fell for a second consecutive auction. The prices were down 4.6% with average price printing $3723. A small hint of demand destruction around the world.

CAD

Inflation data for the month of September showed a third consecutive decline in the headline number as it printed 6.9% y/y vs 7% y/y in August. Continued fall of gasoline prices helped pull inflation down. Core measures were unchanged with median printing 4.7% y/y, common 6% y/y and trimmed 5.2% y/y. Food inflation rose 11.4% y/y making it the fastest y/y pace since 1981!

This week we will have BOC meeting. Markets are divided between 50bp and 75bp rate hike. We are leaning toward a 75bp rate hike as inflation expectations reached a new high and labor market is still in good condition.

Important news for CAD:

Wednesday:

• BOC Interest Rate Decision

JPY

Headline inflation in August on national level remained unchanged at 3% y/y with ex energy component also rising to 3% y/y from 2.8% y/y in July and ex fresh food, energy inflation climbing to 1.8% y/y from 1.6% y/y the previous month. Ex energy component reached its highest level since 2014 but is still much lower than around the world and inflation picture will not spur BOJ into acting next week. USDJPY crossed the 149 level reaching the highest since 1990 and then on Thursday it crossed the psychologically important 150 level continuing to march on over the 151 level with the pair being up for 13 consecutive days! JPY has already lost 30% of its value against the USD since year started!

This all has changed as BOJ intervened in the markets on Friday in London fix. Their move dropped USDJPY toward the 145 level and although the pair recovered to almost 148 it was a strong signal from monetary authorities out of Japan. They did not confirmed intervention stating that they would not admit it even if they did it. Monetary policy divergence between the US and Japan is too great and that will keep pushing the pair up rendering these interventions dip buying opportunities. Caution is advised as the moves can get pretty wild.

This week we will have BOJ meeting as well as inflation data for the Tokyo area. No changes in monetary policy are expected, however it could be used as a chance for intervention in currency markets so caution is advised.

Important news for JPY:

Friday:

• BOJ Interest Rate Decision
• CPI

CHF

SNB total sight deposits for the week ending October 14 continued to decline and came in at CHF619.8bn vs CHF639.3bn the previous week. This is another big drop, almost CHF20bn, marking the third consecutive week of declines. SNB continues selling USD and EUR. One possibility is that they want to influence Swiss Average Rate Overnight (SARON) towards 0.50, so it matches the interest rate set by SNB.

 

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Forex Major Currencies Outlook (Oct 31 – Nov 4)

We are in for a massive week filled with Fed, BOE and RBA meetings, combined with preliminary GDP and CPI data from Eurozone, official PMI data from China as well as employment data from the US (NFP), Canada and New Zealand.​

USD

Q3 GDP printed a healthy 2.6% annualised and thus moved from negative readings in previous two quarters. IEntire Q3 GDP was due to big gains in net trade which contributed with 2.77pp. Personal consumption grew by 1.4% and contributed 0.97pp to the reading while fixed investment deducted -0.89pp from the GDP. PCE data for the September came in at 6.2% y/y, unchanged from the previous month. Core PCE rose 5.1% y/y, up from 4.9% y/y in August, however lower than 5.2% y/y as expected.

The yield on a 10y Treasury started the week at around 4.165%, fell during the week below 4% and then climbed back above it as markets were coming to a close. The yield on 2y Treasury reached 4.56% during the week and then dropped bellow 4.4% as the week was coming to an end. Spread between 2y and 10y Treasuries started the week at -30bp and widened to -36bp. FedWatchTool sees the probability of a 50bp rate hike in November at 13.5% with a probability of a 75bp rate hike at 86.5%.

This week we will have ISM PMI data, Fed meeting and NFP on Friday. Fed is expected to raise interest rate by 75bp and signal more to come, markets are pricing 50bp in December. Headline NFP number is seen around 200k with the unemployment rate staying at 3.5%.

Important news for USD:

Tuesday:

• ISM Manufacturing PMI

Wednesday:

• Fed Interest Rate Decision

Thursday:

• ISM Non-Manufacturing PMI

Friday:

• NFP
• Unemployment Rate

EUR

Preliminary Eurozone PMI data for October showed that situation continues to deteriorate. Manufacturing PMI came in at 46.8 vs 48.4 the previous month thus falling every month since February. Both German and French reading continued to decline as high energy costs and increasing cost of living weigh on the sector. Services dropped to 48.2 with German reading printing measly 44.9. French reading still hangs above 50 with 51.3. Finally, composite came in at 47.1 vs 48.1 in August, marking the fourth consecutive month of below 50 readings. S&P notes that price pressures remain elevated and which should keep ECB on a tightening path. Additionally, they state that ““While October’s headline flash PMI is consistent with GDP falling at a modest rate of around 0.2%, demand is falling sharply and companies are increasingly growing worried over high inventories and weaker than expected sales, especially as winter approaches. The risks are therefore tilted towards the downturn accelerating towards the year-end. “

ECB has delivered a 75bp rate hike as widely expected thus lifting the deposit facility rate to 1.50%. They are expected to continue raising interest rates in order to bring inflation down to 2%. Some sources reported that three members voted for a 50bp rate hike. TLTRO program saw changes as now there will be higher costs from November and there are earlier repayment days. It is one of the ways that ECB is removing liquidity from the system. ECB President Lagarde stated at the press conference that substantial progress in withdrawing accommodation has been made. Te bank has hiked rates in total of 200bp in little over three months. Inflation is far to high and ECB continue to be data dependent with meeting-by-meeting stance. Further economic weakening is expected this and next year. She stated that the bank watches 3 key factors: inflation outlook, effects of the measures taken so far and transmission lag of monetary policy. Markets are pricing terminal rate at around 2.75%.

This week we will have preliminary Q3 GDP reading and inflation reading for October, which is expected to continue going up as both German and French readings continued higher.

Important news for EUR:

Monday:

• CPI
• GDP

GBP

Preliminary PMI data for October point to contraction in Q4. All three categories are now below the 50 level. Manufacturing came in at 45.8, services at 47.5 and composite at 47.2. Services represent a 21-month low while the manufacturing print is a 29-month low. UK economy is caught in a deadly spiral of weaker demand, high inflation, increasing political uncertainty and rising interest rates.

Rishi Sunak has become the new Prime Minister as he was the only candidate to receive the 100 nominations needed. At age of 42 he is now the youngest Private Minister in the modern history. In his first speech he admitted that mistakes were made and acknowledged that Liz Truss was not wrong to focus on growth. He added that there will be difficult decisions going forward,

This week we will have a BOE meeting. Expectations are for unprecedented 75bp rate hike.

Important news for GBP:

Thursday:

• BOE Interest Rate Decision

AUD

Inflation data for the Q3 came in red hot. Headline CPI increased 1.8% q/q and 7.3% y/y vs 7.1% y/y as expected and 6.1% y/y in Q2. Yearly headline number is highest in 32 years. Food and housing were the main contributors to the rise in inflation. Core measures came in at 1.8% q/q vs 1.5% q/q in the previous quarter and 6.1% y/y vs 4.9% y/y in Q2. RBA is targeting core CPI y/y to be in 2-3% range and with it printing 6.1% y/y it just shows that RBA has more work to do in order to subdue inflation. Although 25 bp rate hike at next week’s meeting is priced in markets are now adding to the possibility of a 50bp rate hike.

National party congress saw that being a number 1 economy in the world is no longer a priority, now it is seen as ill advisable to pursue that goal. Technology and security were new buzzwords at the meeting which means self-sufficiency and more military spending. President Xi Jinping managed to strengthen his power further and remove reformists from the Politburo while publicly humiliating them in front of the media.

After the congress was finished economic data was released and it saw Q3 GDP rise at 3.9% y/y. September data saw industrial production rise 6.3% y/y vs 4.2% y/y in August while retail sales rose 2.5% y/y compared to 5.4% y/y the previous month. Trade surplus widened to $84.74bn with exports rising 5.7% y/y and imports 0.3% y/y. Trade surplus with the US narrowed down to $36.1bn.

This week we will have RBA meeting. Markets see a 25bp rate hike, however the possibility of a 50bp rate hike after the red hot inflation print is rising. We will also get official PMI data from China.

Important news for AUD:

Monday:

• Manufacturing PMI (China)
• Non-Manufacturing PMI (China)
• Composite PMI (China)

Tuesday:

• RBA Interest Rate Decision

NZD

RBNZ chief economist Conway stated that they are hopeful inflation has peaked. He admitted that RBNZ underestimated the strength of tradable inflation. He added that the fall in house prices is expected to slow consumption and that China is no longer the deflationary force it once was. Business confidence plunged in October to -42.7 from -36.7 in September after three consecutive months of improvements. ANZ noted that inflation pressures remain intense in the economy.

This week we will have employment data for Q3.

Important news for NZD:

Tuesday:

• Employment Change
• Unemployment Rate

CAD

BOC has delivered a 50bp rate hike thus bringing the overnight rate to to 3.75%. “The Bank is also continuing its policy of quantitative tightening.” The economy is operating in excess demand and labor shortages. They have acknowledged that their rate hike moves are affecting housing market as housing activity dropped sharply. Bank now projects growth to be lower than in July and to come at 0.9% in 2023 vs 1.8% in July and 2% in 2024 vs 2.4% in July. Although inflation has been declining since July due to falling gasoline prices “The Bank’s preferred measures of core inflation are not yet showing meaningful evidence that underlying price pressures are easing.” More rate hikes will be needed. Inflation is expected to fall to 3% in late 2023 and then return to 2% in 2024.

At the press conference Governor Macklem stated that BOC is getting closer to end of tightening cycle but that there is still room for higher rates as they are far away from ensuring stable and low inflation. He admitted that high interest rates are starting to affect growth adding that it is expected that growth will stall in the next few quarters. He took a much more dovish stance during the press conference warning about the slowing growth ahead.

This week we will have employment data.

Important news for CAD:

Friday:

• Employment Change
• Unemployment Rate

JPY

BOJ has again intervened in the markets on Monday at the start of Asia session when liquidity is low. The move managed to drop USDJPY by almost 500 pips, however by the time London session was open the pair almost reversed all of the losses. Later on it was calculated that the size of the intervention was between $5 and $6bn. Preliminary PMI data for the month of October saw manufacturing slip to 50.7, seventh month of declines, while services improved to 53 from 52.2 in September and thus pushed composite to 51.7 from 51 the previous month. Data points to encouraging start of the Q4 for the economy.

BOJ meeting was uneventful. The rate was left at -0.10% and yield on 10y JGB was capped at 0.25% with commitment for daily unlimited bond-buying. The report stated that economy is picking up but uncertainty is very high. Risks to the price outlook are skewed to the upside while risks to the economic outlook are skewed to the downside. Core-core CPI forecasts have been revised up from July meeting to 1.8% in 2022 and 1.6% in both 2023 and 2024. Real GDP is seen at 2% in 2022, 1.9% in 2023 and 1.5% in 2024. There was a mention that underlying rise in inflation will likely lead to heighten medium and long-term inflation expectations and it will come in combination with wage increases. Governor Kuroda reiterated bank’s readiness to ease monetary policy further if needed. He added that they must be vigilant to financial and currency market moves and their impact on Japan's economy and prices and avoided to comment on intervention in currency markets.

CHF

SNB total sight deposits for the week ending October 21 came in at CHF597.6bn vs CHF619.8bn the previous week. The bank continues selling EUR and USD and deposits drop again around CHF20bn. This is the fourth consecutive week of declines as SNB tries to influence Swiss Average Rate Overnight (SARON) towards 0.50, so it matches the interest rate.

 

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Forex Major Currencies Outlook (Nov 7 – Nov 11)

We will take a break from Central Bank meetings but the week ahead of us will have Midterm elections and inflation from the US.​

USD

ISM manufacturing PMI for the month of October came in at 50.2 vs 50 as expected and down from 50.9 the previous month. Digging into the details of the report prices paid fell below 50 indicating easing price pressures while drop in supply deliveries indicates faster delivery times. Production, employment and new orders all showed increases, although new orders still remain below the 50 level. New export orders declined as demand from overseas is drying up. Backlog of orders dropped into contraction showing that number of incoming orders is declining rapidly.

Fed has delivered expected 75bp rate hike, fourth in a row, and moved the Fed funds rate in the range of 3.75-4%. Opening statement contained the hint of much awaited “pivot”. It said "In determining the pace of future increases in the target range, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation and economic and financial developments." Markets rolled with it and pushed USD almost 100 pips against the majors as equities rallied.

Fed Chairman Powell told a different story. At the press conference he stated that we will have a slower pace of rate hikes, but terminal rate will be higher. He stated that that Fed still has a long way to go. This reversed the fortunes in the markets as repricing was on and USD started to gain erasing all losses mad just half an hour ago. Powell added that window for soft landing is narrowing but it is still possible to achieve it and that they are aware that strong dollar is hurting other economies, but nevertheless terminal rate will still go higher. Inflation is still the main concern and Chairman said repeatedly that Fed has the tools and that they will bring it down to 2%. With cumulative interest rates totaling 375bp in 2022 we can expect that this was the last 75bp rate hike and that December will be a 50bp rate hike.

ISM non-manufacturing PMI came in at 54.4 vs 55.5 as expected and down from 56.7 in September. Prices paid and supplier deliveries components increased indicating growing inflation pressures and weakening of supply chains. The report showed drop in employment, going below 50, as well as drop in new orders and increase in inventories. New export orders plunged hard as combination of strong USD and weak foreign demand hurt the index. Details of the report point to the fact that Fed’s tightening process is showing results which in turn could lead to short-term USD weakness.

NFP headline number for October came in at 261k vs 200k as expected. However, good news stopped there. The unemployment rate ticked up to 3.7% with participation rate sliding to 62.2% from 62.3% in September. Underemployment (U6) rate ticked to 6.8% from 6.7% the previous month. Average hourly earnings rose 0.4% m/m and 4.7% y/y vs 0.3% m/m and 5% y/y in September.

The yield on a 10y Treasury started the week at around 4.05%, fell during the week below 4% and then climbed back above it after the Fed meeting. The yield on 2y Treasury reached 4.7% during the week. Spread between 2y and 10y Treasuries started the week at -43bp and widened to -61bp. FedWatchTool sees the probability of a 50bp rate hike in December at 56.8% with a probability of a 75bp rate hike at 43.2%.

This week we will have Midterm elections and inflation data for October which is expected to show a small tick down in headline reading.

Important news for USD:

Tuesday:

• Midterm Elections

Thursday:

• CPI

EUR

Preliminary September CPI data for the Eurozone crossed firmly into double digits with a 10.7% y/y reading, up from 9.9% y/y in August. Headline inflation increased 1.5% m/m vs 1.2% m/m the previous month. Energy prices were the biggest contributor to rising prices, followed by increases in prices of food and imported industrial goods. Core inflation rose 5% y/y vs 4.8% y/y in August. With core inflation continuing its upward trajectory ECB may be pushed to continue hiking even after President Lagarde sounded more dovish at the last press conference. ECB President Lagarde stated that recession alone is not enough to bring inflation down. Her statement can be interpreted as ECB’s intent to continue hiking rates even as economy crashes. Eurorzone managed to avoid recession is Q3 as GDP came in at 0.2% q/q.

GBP

Final manufacturing PMI for the month of October was revised up to 46.2 vs 45.8 as preliminary reported. Output, new orders and new export orders are declined. Inflation in the UK and around the world is killing both domestic and foreign demand. Surging energy costs and weak pound are main concern for the manufacturers according to S&P Global. Services were also revised up to 48.8 from 47.5 as preliminary reported which lifted composite to 48.2 from 47.2 as previously reported. New orders and new export orders are shrinking along with business optimism which is now at weakest since April of 2020.

BOE delivered a 75bp rate hike bringing the rate to 3%. The decision to hike rate was unanimous (9-0), but one member voted for a 25bp hike and other for a 50bp rate hike. More rate hikes are to come in the future but they will be not go as high as 5.20% as market is currently pricing in. Bank members noted that financial conditions tightened significantly since August and that 75bp hike is made in order to reduce risk of unnecessary tightening later on. Inflation is now expected to peak at 11% in Q4 of 2022 which is lower than anticipated in August. CPI is expected to start dropping from early next year. It is expected to fall below the 2% target in two years’ time, and further below the target in three years’ time. Projection for Q3 GDP was revised down while estimate for a 2022 GDP was revised up.

This week we will get Q3 GDP data.

Important news for GBP:

Friday:

• GDP

AUD

RBA has delivered a 25bp rate hike as was widely expected thus bringing the cash rate to 2.85%. Inflation is now expected to peak at around 8% later in the year. Medium-term inflation expectations remain well anchored and bank’s forecast is for CPI inflation to be around 4.75% over 2023 and a little above 3% over 2024. Economy is growing at a solid pace but will moderate in 2023. “The Bank’s central forecast for GDP growth has been revised down a little, with growth of around 3 per cent expected this year and 1½ per cent in 2023 and 2024.” Labor market remains tight and wages are picking up. The bank expects the unemployment rate to rise little above 4% in 2024 as economic growth slows. They have also acknowledged that higher interest rates and higher inflation are putting strains on household budgets. There will be more rate hikes to come and they will depend on incoming data as well as bank’s assessment regarding inflation and labor market.

Official PMI data from China for the month of October fell into contraction. Manufacturing came in at 49.2, non-manufacturing at 48.7 and composite at 49. New orders and new export orders continued to decline. Caixin manufacturing also printed 49.2, however it improved from 48.1 in September. It also saw declines in output and new orders. Caixin services slumped further to 48.4 and composite to 48.3.

This week we will get trade balance and inflation data from China.

Important news for AUD:

Monday:

• Trade Balance (China)

Wednesday:

• CPI (China)

NZD

Q3 employment report was a strong one with employment change going up 1.3% q/q vs being flat in Q2. The unemployment rate remained at 3.3% while participation rate saw a huge jump to 71.7% from 70.8% the previous quarter. Additionally, wages were increasing on a yearly basis, but were coming down on a quarterly basis.

CAD

BOC Governor Macklem stated in front of the Parliament that policy rate is expected to rise further, the pace and target will depend on how monetary policy is performing. He added that inflation measures have stopped rising but they are still not falling. He character\sed 50bp rate hikes as not normal but a big step and stated that they are still unsure whether next rate hike will be a big step or it will allow for return to normal steps.

October employment report was a stellar one. Employment change came in at 108.3k vs 10k as expected, a 10 times higher number! The unemployment rate remained unchanged at 5.2% while participation rate ticked up to 64.9% from 64.7% in September. Wages rose 5.5% y/y vs 5.2% y/y the previous month. All of new jobs created were full-time jobs (118.3k) while part-time jobs declined (-11k). Combination of very tight labor market and rising wages may push BOC toward a big step rate hike at the next meeting.

JPY

Preliminary September industrial production data showed a decline of -1.6% m/m with 4.5% y/y vs 5.8% y/y in August. Consumption fared much better than production for the same period as it rose 1.1% m/m and 4.5% y/y. Ministry of Finance admitted that they have spent JPY6.3 trillion ($42.5bn) in the month of October on currency intervention.

CHF

SNB total sight deposits for the week ending October 28 came in at CHF581.6bn vs CHF597.6bn the previous week. The bank continues to sell euros and dollars as investors move their funds away from the central bank. SNB reported that its loses totaled CHF597.6bn for the nine month period since the beginning of the year. A deadly combination of rising interest rates and Swissy strength caused losses on bank’s foreign investments. October CPI came in at 3% y/y vs 3.2% y/y as expected and down from 3.3% y/y in September. A second consecutive month of declines as inflation slowly moves toward SNB’s target. Core was steady at 1.8% y/y.

 

[katetrades]

Forex Major Currencies Outlook (Nov 14 – Nov 18)

After US inflation surprised to the downside we will see how inflation fares in the UK and Canada. We will also see employment data from the UK and Australia as well as preliminary Q3 GDP data from Japan.​

USD

Inflation in October surprised to the downside with the headline number coming in at 7.7% y/y vs 8% y/y and down from 8.2% y/y in September. This marks the fourth consecutive month of falling inflation reading and it will definitely raise stories about inflation peaking in July. Shelter was the biggest contributor while used cars, airline fares and apparel were down. Core CPI reading came in at 6.3% y/y, down from 6.6% y/y the previous month. USD got hammered across the board with some pairs, GBPUSD, rising almost 150 pips within 5 minutes. Dollar’s weakness continued till the end of the week with all major pairs being significantly up.

The yield on a 10y Treasury started the week at around 4.16%, rose during the week above 4.24% and then slumped down below 4% after the soft inflation report finishing the week at around 3.8%. The yield on 2y Treasury reached 4.74% during the week. Spread between 2y and 10y Treasuries started the week at -52bp and widened to -56bp. FedWatchTool sees the probability of a 50bp rate hike in December at 80.6% with a probability of a 75bp rate hike at 19.4%.

This week we will have consumption data.

Important news for USD:

Wednesday:

• Retail Sales

EUR

ECB Villeroy stated that it may take 2-3 years for inflation to drop to target of 2%. He added that they are getting close to neutral rate but they should keep raising interest rates until there are signs that inflation has peaked. One possible case is for inflation to peak in Q1 of 2023. ECB vice-president de Guindos stated that inflation will float around present levels in the next few months and then decline in the H1 2023. He sees ECB for sure starting QT in 2023.

This week we will have a second estimate of Q3 GDP.

Important news for EUR:

Tuesday:

• GDP

GBP

Preliminary Q3 GDP came in at -0.2% q/q vs -0.5% q/q as expected. ONS notes that reading was affected by the bank holiday for the State Funeral of Her Majesty Queen Elizabeth II, Construction output rose 0.6% q/q, services were flat while production fell 1.5% q/q. Real household consumption fell 0.5% q/q, same as business investment while real government spending rose 1.3% q/q. Export volumes were up 8% q/q while import volumes were down -3.2% q/q.

Reports have surfaced in UK media revealing that government plans fiscal tightening to the tune of around £60bn. Tightening will be made through tax cuts (around £35bn) and spending cuts (around £25bn). BOE chief economist Pill stated that the bank will have to continue tightening monetary policy and added that they will not be on a pre-set path. He also added that, at some point, they will have to incorporate broader economic outlook in their decision making process.

This week we will have employment and inflation data.

Important news for GBP:

Tuesday:

• Claimant Count Change
• Unemployment Rate

Wednesday:

• CPI

AUD

Trade balance data from China for the month of September saw widening of surplus to $85.15bn from $84.74bn in August. However, expectations were for trade surplus to increase to $95.75bn. Exports fell -0.3% y/y, a first drop since May of 2020, while imports fell -0.7% y/y. Exports to Europe fell 6% m/m and 9% y/y with exports to the US falling 7.4%m/m and 13% y/y. The biggest drop was seen in electronic product exports. High inflation in those two areas led to weaker demand. CPI for October printed 2.1% y/y vs 2.4% y/y as expected and down from 2.8% y/y in September. PPI went into negative with -1.3% y/y marking the whole year, twelve consecutive months, of falling input prices.

This week we will have employment data from Australia as well as production and consumption data from China.

Important news for AUD:

Tuesday:

• Industrial Production (China)
• Retail Sales (China)

Thursday:

• Employment Change
• Unemployment Rate

NZD

RBNZ Governor Orr has been reappointed for a new 5-year term. Inflation expectations published by RBNZ showed further increases with 1 year showing 5.08% vs 4.86 in Q3 and 2 year printing 3.62% vs 3.07% as shown in Q3. The 2 year reading is highest since 1991 and markets are now leaning toward a 75bp rate hike at the next meeting.

CAD

BOC Governor Macklem stated that rebalancing of labor market is needed in order to bring back inflation down to 2%. Job loses are likely to increase in the coming months and he added that unemployment rate will go up, not significantly, but it will go up. He added that slight negative growth is possible during next few quarters but emphasized that it does not represent severe recession in any way. Regarding inflation, he stated that bank is particularly focused on core readings as reduction in headline reading is primarily due to drop in oil prices. Regarding future rate hikes he remained vague and stated that it could be another larger than normal rate hike or they can revert back to normal size rate hikes.

This week we will have inflation data.

Important news for CAD:

Wednesday:

• CPI

JPY

Household spending in the month of September continued to improve but at a slower pace as it came in at 2.3% y/y vs 2.7% y/y as expected and down from 5.1% y/y the previous month. Wages data showed nominal wages progressing further and rising 2.1% y/y, however when accounted for inflation, real wages, they fell 1.3% y/y.

This week we will have preliminary Q3 GDP reading.

Important news for JPY:

Tuesday:

• GDP

CHF

SNB total sight deposits for the week ending November 4 came in at CHF572.1bn vs CHF581.6bn the previous week. This makes it a seventh consecutive week of falling deposits. Seasonally adjusted unemployment rate for September remained at 2.1%. SNB’s Maechler stated that further rate hikes are not out of the question as inflation remains too high. SNB Chairman Jordan came out with firmer comments stating that current monetary policy is not restrictive enough to bring down prices. Swissy immediately gained strength as chances of a rate hike at December meeting increased substantially.

 

[katetrades]

Forex Major Currencies Outlook (Dec 12 – Dec 19)


A truly massive week is ahead of us with four major central bank (Fed, ECB, BOE and SNB all expected to raise rates by 50bp) as well as Norges Bank and Bank of Mexico meetings. Additionally, we will get inflation data from the US and the UK, employment data from the UK and Australia and preliminary December PMI data from the EU, the UK and Japan.​

USD

ISM services PMI for November printed 56.5 vs 53.3 as expected and up from 54.4 in October. Prices paid and supplier delivery components declined. New orders slipped slightly but remained at a very healthy level while new export orders plunged below 40 indicating that strong dollar adds pain to already weak foreign demand. Employment index returned into expansion territory with 51.5.

The yield on a 10y Treasury started the week at around 3.53%, rose during the week to 3.6%, then fell and finished the week at around 3.5%. The yield on 2y Treasury reached 4.33% during the week. Spread between 2y and 10y Treasuries started the week at -80bp and widened to -84bp. FedWatchTool sees the probability of a 50bp rate hike in December at 74.7% with a probability of a 75bp rate hike at 25.3%.

This week we will have inflation data and Fed meeting. Inflation is expected to continue ticking down while 50bp rate hike is being fully priced in by the markets. We will also get new economic projections and a new dot-plot.

Important news for USD:

Tuesday:

• CPI

Wednesday:

• Fed Interest Rate Decision

EUR

ECB member of the Governing Council Villeroy stated that he is in favour of a 50bp rate hike next week and added that rate hikes will continue in 2023. ECB policymaker Makhlouf stated that 50bp rate hike should be the minimum next week adding that it would be premature to talk about terminal rate. ECB's Herodotou announced more rate hikes coming and added that they are very near neutral rate. ECB Chief Economist Lane also expects more rate hikes and added that “a lot has been done already”.

This week we will have ECB meeting and preliminary December PMI data. A 50bp rate hike is what markets are expecting, with around 75% probability.

Important news for EUR:

Thursday:

• ECB Interest Rate Decision

Friday:

• CPI
• S&P Global Manufacturing PMI (EU, Germany, France)
• S&P Global Services PMI (EU, Germany, France)
• S&P Global Composite PMI (EU, Germany, France)

GBP

Pound had a quiet week, moving in range of almost 150 pips against the USD. First it reached the high on Monday, then the low on Wednesday and returned back to Monday’s high on Friday. The currency utilised CAD’s weakness and GBPCAD pair shoot over the 1.67 level,

This week we will have a plethora of data from the UK starting with GDP, then moving to employment, inflation, BOE meeting and finishing with preliminary PMI data for December. BOE is expected to raise interest rate by 50bp.

Important news for GBP:

Monday:

• GDP

Tuesday:

• Claimant Count Change
• Unemployment Rate

Wednesday:

• CPI

Thursday:

• BOE Interest Rate Decision

Friday:

• S&P Global Manufacturing PMI
• S&P Global Services PMI
• S&P Global Composite PMI

AUD

RBA delivered a 25bp rate hike as expected bringing the cash rate to 3.1%. Further interest rates are expected over the coming period as inflation is too high and board remains determined to bring inflation back to their target of 2-3%. A further increase in inflation is expected with inflation peaking at 8% in Q4 of 2022. The bank sees inflation declining over the next couple of years and settling at little above 3% in 2024. The economy is growing solidly and projected growth is at around 1.5% for both 2023 and 2024. Household spending is expected to slow down over the coming months. Size and timing of future increases determined by data and outlook for inflation and labor market.

Q3 GDP printed an increase of 0.6% q/q vs 0.7% q/q as expected and down from 0.9% q/q in Q2. Terms of trade declined by 6.6% in Q3 while household saving ratio decreased to 6.9% from 8.3% as high inflation causes people to spend more and decreases their ability to save. Household spending rose 1.1% thanks to increased spending on hotels, cafes and restaurants as well as on transport services. Government spending rose 0.1% with private investment rising 0.8% and public investment falling 3.4%.

Caixin services PMI continued to plunge in November and printed 46.7 vs 48.4 in October. This has dragged the composite to 47 from 48.3 the previous month. Covid restrictions in China weighed heavily on business activity. Trade balance data showed more pain caused by covid restrictions. Surplus declined to $69.84bn from $85.15bn in October as exports plunged 8.7% while imports fell even more 10.6%. Chinese authorities announced that milder and asymptomatic cases will be able to quarantine at home and that it will accelerate vaccination of elderly. Negative covid test will no longer be required for domestic travel. These are big steps towards abandoning of zero-Covid policy. Inflation data for November saw CPI drop to 1.6% y/y from 2.1% y/y in October while PPI printed another drop of 1.3% y/y reading, just as previous month.

This week we will have employment data from Australia as well as production and consumption data from China.

Important news for AUD:

Thursday:

• Employment Change
• Unemployment Rate
• Industrial Production (China)
• Retail Sales (China)

NZD

GDT index increased by 0.6% at the latest auction marking the second consecutive auction of rising dairy prices. Fonterra, a company that is responsible for around 30% of world’s dairy exports, lowered the year-end price for farmgate milk.

This week we will have a Q3 GDP reading.

Important news for NZD:

Wednesday:

• GDP

CAD

BOC delivered a 50bp rate hike bringing the interest rate to 4.25%, however the message was dovish. Although markets were expecting a 25bp rate hike and were positively surprised with a larger 50bp rate hike the accompanying statement was abound with hints that BOC will stop their pace of rate hikes in the near future. Sentences like "growing evidence that tighter monetary policy is restraining domestic demand" and "growth will essentially stall through the end of this year and the first half of next year" indicated that consumer spending and housing market are weakening leading to a weaker growth. Inflation is also expected to moderate as “price pressures may be losing momentum". The final paragraph showed that the bank is now considering whether further rate hikes will be necessary.

JPY

October wage data showed that real wages fell -2.6% y/y which is the highest drop since 2015. Nominal wages rose for the tenth consecutive month, came in at 1.8% y/y, but the increase was crushed by the higher inflation. Without wage growth inflation cannot be sustained at 2% as BOJ Governor Kuroda was quick to point out. Household spending increased for the fifth straight month and came in at 1.2% y/y. Final Q3 GDP saw small improvement with -0.2% q/q and -0.8% annualized vs -0.3% q/q and -1.2% annualized as preliminary reported.

CHF

SNB total sight deposits for the week ending December 2 came in at CHF549.8bn vs CHF555.4bn the previous week. Total sight deposits continue to decline but it seems that the pace is slowing down. Seasonally adjusted unemployment rate in November ticked down again to 2%. Tightness of the labour market is astonishing as the unemployment rate is lowest among developed economies.

This week we will have SNB meeting where another 50bp rate hike is expected.

Important news for CHF:

Thursday:

• SNB Interest Rate Decision

 

[katetrades]

Forex Major Currencies Outlook (Dec 19 – Dec 23)​

BOJ meeting coupled with inflation from the US and Canada are here to slowly wind down news for the 2022.

USD

The November CPI report printed 7.1% y/y vs 7.3% y/y as expected and down from 7.7% y/y in October and rose only 0.1% m/m vs 0.3% m/m as expected and 0.4% m/m the previous month. Core CPI also declined and came in at 6% y/y vs 6.1% y/y as expected and down from 6.3% y/y in October. Bigger than expected drops led to big decline in USD and rise in S&P 500 as a sign of risk on mode. Used cars were biggest drag followed by gasoline and energy. Fuel oil and owners-equivalent rent (shelter) were the biggest contributors.

Fed meeting brought as a well expected 50bp rate hike which pushed Federal Funds rate into the range of 4.25-4.50%. The statement showed that “ongoing increases” in the rate will be appropriate. The dot plot shows median rates for 2023 at 5.1% compared to 4.6% it showed in September. For 2024 it is at 4.1% vs 3.9% in September. Growth is seen moderating and GDP will rise 0.5% in 2023 while the unemployment rate will climb to 4.6% from 3.7% where it is currently at. Inflation is characterised as too high and bringing it down to the 2% target will be Fed’s main objective.

Fed Chairman Powell said that a lot of ground has been covered but there is still work to do on the rates front and added that they will stay the course until job is done. He strongly stated that rate cuts will be considered “if there is confidence that inflation is moving down to 2%". The view of the FOMC is to keep on with rate hikes until inflation falls. On the expected rise in unemployment he commented that 4.7% unemployment rate is still a mark of a tight labor market. FOMC members find appropriate to slow down the pace of rate hikes. Additionally, there is no talk about changing inflation targets.

The yield on a 10y Treasury started the week at around 3.6%, fell after the CPI and FOMC below 3.48% and finished the week at around 3.52%. The yield on 2y Treasury reached 4.44% during the week and fell below 4.15 after the CPI. Spread between 2y and 10y Treasuries started the week at -78bp and narrowed to -73bp. FedWatchTool sees the probability of a 25bp rate hike in February at 73% with a probability of a 50bp rate hike at 27%.

This week we will have Fed’s preferred inflation metric.

Important news for USD:

Friday:

• PCE

EUR

ECB has delivered a 50bp rate hike as expected at their December meeting thus raising it to 2%. The statement shows that “interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target.” Inflation is too high and is expected to stay above the target for too long. The average inflation is now seen reaching 8.8% in Q4 and then decreasing to 6.3% in 2023, 3.4% in 2024 and 2.3% in 2025. Eurozone economy is seen growing by 3.4% in 2022, 0.5% in 2023, 1.9% in 2024 and 1.8% in 2025. The principal payments from Asset Purchase Program (APP) will be reinvested fully until the end of February of 2023. From the beginning of March 2023 onwards all principal payments will not reinvest and that decline will amount to €15 billion per month on average until the end of Q2 2023. Detailed parameters of reduction, a QT, will be announced at the February meeting. Regarding the PEPP, the principal payments from maturing securities purchased under the programme will be reinvested until at least the end of 2024. ECB sounded most hawkishly out of all central banks and banks around the globe now see much higher terminal rate (3.25-3.75%). ECB President Lagarde clarified that we will be seeing a series of 50bp rate hikes going forward.

Preliminary December PMI data from Eurozone saw improvements in all three readings. Manufacturing rose to 47.8 from 47.1 as improvements can be seen in both German and French readings. This marks the second consecutive month of rising data. Services came in at 49.1, up from 48.5 in November and it pushed composite to 48.8 from 47.8 the previous month. German services were up while French reading missed estimates. S&P notes that “While the further fall in business activity in December signals a strong possibility of recession, the survey also hints that any downturn will be milder than thought likely a few months ago." Supply chains easing in combination with reduced fear of rising energy prices and cost-of-living crisis helped readings move closer to the expansion territory.

GBP

The employment report saw claimant count for November rise to 30.5k from downwardly revised -6.4k in October. ILO unemployment rate in October ticked up to 3.7% while average weekly earnings rose 6.1%. In the real terms, earnings continued to decline as inflation is much higher than earnings thus exacerbating cost of living crisis. Payrolls change rose 107k compared to 79k the previous month as more people finds jobs adding to the tightness of labor market.

November CPI declined by more than expected as it came in at 10.7% y/y vs 11.1% y/y in October. Housing and household services were the main contributors to rising prices followed by food and non-alcoholic beverages, furniture and household goods, restaurants and hotels. Drops in costs of transport and second-hand cars were the main reasons for a decline in inflation. Core reading also declined as it came in at 6.3% y/y vs 6.5% y/y the previous month. A much welcomed decline in price pressures, but they are still at astronomically high levels for a developed economy.

BOE has delivered a 50bp rate hike as expected thus increasing rate to 3.50%. Bank vote was 6-3 with two members voting for no change in the rate while one member wanted a 75bp rate hike. More rate hikes may be required. Price pressures as well as wage pressures remain elevated. Inflation is expected to decline in Q1 of 2023. Q4 GDP is seen falling -0.1% which is 0.2% stronger than expected in November (-0.3%). A slower pace of rate hikes going further combined with the fact that two members wanted to stop rate hikes and that inflation is seen peaking will have negative effect on GBP going further.

Preliminary December PMI reading saw manufacturing plunging to 44.7 which is the lowest reading since May of 2020. On the bright side, services rose to the neural level of 50 and dragged with it composite to 49. S&P notes that “The December data add to the likelihood that the UK is in recession, with the PMI indicating a 0.3% GDP contraction in the fourth quarter".

AUD

Employment report for November saw employment change almost double from the previous month and show 64k new jobs added. The unemployment report remained at 3.4% while participation rate improved to 66.8% from 66.5% in October. More than half of the jobs added were full-time (34.2k) with part-time being at 29.8k. Yet another strong report indicating tightness of the labor market. Its glow will be darkened by the continuation of rising inflation expectations.

Industrial production data for November fell to 2.2% y/y from 5% y/y in October while retail sales plunged to -5.9% y/y from -0.5% y/y the previous month. The data is heavily impacted by the strict lockdowns, however with the new signs and talks about reopening markets are looking past the bleak data. Hong Kong authorities decided to stop its three-day monitoring period for new arrivals in the territory as additional covid related restrictions are easing.

NZD

New Zealand Treasury forecasts three quarters of negative GDP growth indicating that recession will start in Q2 of 2023. RBNZ came out with a statement repeating that actual and expected inflation is too high and needs to be reduced. Expectations are for spending to slow down and the unemployment rate to go up as more people join the workforce. Still, employment levels are expected to remain high. Q3 GDP beat the expectations and improved to 2% q/q and 6.4% y/y from 1.9% q/q and 0.3% y/y in the previous quarter.

CAD

Manufacturing sales for October came in at 2.8% m/m vs 2% m/m as expected and up from being flat in September. Sales have increased in 12 of 21 industries and are now up 16.3% y/y. Wholesale trade for the same month improved 2.1% vs 1.3% as expected and up from -0.2% the previous month. Housing starts continued to decline in November, however at a slower pace, as they came in at 264.2k.

This week we will have inflation data.

Important news for CAD:

Wednesday:

• CPI

JPY

Core machinery orders for the month of October came in at 5.4% m/m and 0.4% y/y. Monthly reading was improvement but series is still declining on a yearly basis. Core machinery orders are considered a good indicator of CAPEX for a 6-9 months period in the future. Trade data for November saw tightening of deficit to -JPY20274.bn as exports rose by 20% y/y while imports rose by 30.3% y/y. Exports to the US and the EU were up 32.5% y/y and 32% y/y respectively. Preliminary December PMI data showed manufacturing slip to 48.8 from 49 in November as output and new orders continue to decline. The reading has been falling since April of this year and this is the lowest reading since September of 2020. Services improved to 51.7 from 50.3 the previous month on the back of growing tourism and it led to composite sitting at the 50 level.

This week we will have a BOJ meeting where no changes are expected.

Important news for JPY:

Tuesday:

• BOJ Interest Rate Decision

CHF

SNB total sight deposits for the week ending December 9 came in at CHF542.3bn vs CHF549.8bn the previous week. Total sight deposits continue to decline for three months, since second week of September. Swiss government came out with new growth and inflation projections and they now see GDP rising 2% in 2022, 1% in 2023 and 1.6% in 2024. CPI is seen at 2.9% in 2022, 2.2% in 2023 and 1.5% in 2024. Overall, they see a slowdown in economy, but they do not expect a recession.

SNB has raised rate by 50bp as was widely expected and new rate is now at 1%. The main goal of rate hikes is to curb inflation and further rate hikes cannot be ruled out. SNB President Jordan stated that underlying inflation pressures have increased and that danger persists that inflation could stay elevated.

 

[katetrades]

Forex Major Currencies Outlook (Jan 9 – Jan 13)

The week ahead of us will have inflation data from the US as a main event.​

USD

ISM Manufacturing PMI for December 48.4 vs 48.5 as expected. It was at 49 in November so this marks second consecutive month of below 50 reading. New orders again printed below 50, for the fourth consecutive time and with new export orders and backlog of orders staying below 50 it indicates that there will be no economic rebound in the near term. One positive is that prices paid fell again and is now well in deflationary territory. The other is that employment index returned into expansion, printing 51.4.

Headline NFP number in December came in at 223k vs 200k as expected and down from 256k in November. The unemployment rate dropped to 3.5% while participation rate went up to 62.3% from 62.2% the previous month. Wage rise started to slowdown as they were up 0.3% m/m and 4.6% y/y vs 0.4% m/m and 4.8% y/y the previous month. Markets have focused on slowing wage growth as potential reason for Fed pivot which lead to USD weakness.

ISM services printed a rather abysmal 49.6, down from 56.5 in November and a huge miss from 55.5 as expected. New orders plunged from 56 to 45.2, into contraction. Employment index also fell into contraction. Small positives can be seen in prices paid continuing to decline, as well as supplier deliveries and new export orders improving. The weakness of the report pushed USD even further down as it gave back almost all of its weekly gains.

The yield on a 10y Treasury started the week and year at around 3.88%, fell during the week below 3.68% and finished the week at around 3.56%. The yield on 2y Treasury reached 4.46% during the week and fell below 4.2% after the ISM services report. Spread between 2y and 10y Treasuries started the week at -54bp and widened to -74bp. FedWatchTool sees the probability of a 25bp rate hike in February at 76.2% with a probability of a 50bp rate hike at 23.8%.

Important news for USD:

Thursday:

• CPI

EUR

Final manufacturing PMI for December in the Eurozone came in unchanged at 47.8, up from 47.1 in November. Final reading saw German reading revised down while French reading was revised up. S&P Global shows that business confidence continues improving due to healing in supply chains and easing of inflationary pressures combined with lowering of concerns regarding energy crisis. On the other hand, the Eurozone is still plagued by weak demand as shown by drops in new orders. Final services reading saw improvement to 49.8 from 49.1 as preliminary reported which pushed composite to 49.3 from 48.8 as preliminary reported. Services sector fared much better than expected and is getting closer to the expansion level (above 50). German, as well as French, reading was revised up and S&P notes easing price pressures as biggest contributor to smaller than expected declines.

Preliminary inflation print for Eurozone in the month of December came in at 9.2% y/y vs 9.7% y/y as expected and down from 10.1% y/y in November. Inflation came down in both Germany and France and was pushed down by the falling oil and natural gas prices. It is most likely that double digit inflation prints are now behind us, unless another surge in energy prices occur. Core CPI came in at 5.2% y/y vs 5% y/y the previous month. ECB will remain focused on core inflation number and it continued to climb. The bank will stay firmly on its rate hiking path.

GBP

Final manufacturing PMI for December improved to 45.3 from 44.7 as preliminary reported, but still down from 46.5 print in November. Energy crisis and increasing price pressures are putting the lid on any potential recovery in manufacturing sector. Final services reading was revised down, enough to put it into contraction territory with a 49.9 reading. Composite remained at 49. New orders continued to decline but price pressures eased. S&P notes that "Stalling recruitment and lower backlogs of work added to signs that service sector companies are now experiencing fewer capacity pressures. Business optimism has recovered from the lows...”

AUD

Official PMI data from China showed further plunges in December as covid restrictions stayed in place. Manufacturing came in at 47 vs 48 in November and services dropped to 41.6 from 46.7 the previous month. This data should have printed a bottom as China is moving toward full reopening by shedding more and more of restrictions. From January 8 there will be no more covid testing for inbound travel which will in turn help increase activity in the services sector. Caixin manufacturing PMI dropped to 49 from 49.4 the previous month as small and medium enterprises are fighting uphill battle against covid restrictions, but with positives seen as business confidence improved to a 10-month high. Caixin services improved to 48 and composite to 48.3 as price remained stable and optimism surged on hopes of economic recovery due to reopening.

NZD

First GDT auction of 2023 saw prices fall by -2.8% lead by a drop of -12.9% in Butter Milk Powder prices. Kiwi was well supported in the second part of the week as risk on mode prevailed in the markets pushing NZDUSD over the 0.635 level.

CAD

Canadian December jobs report came in scorching hot. Employment change came in at 104k vs 8k as expected! The unemployment rate ticked up to 5.2% but participation rate rose to 65% from 64.8% in November. Additionally, full-time employment printed 84.5k while part-time employment printed 19.5k. BOC is now faced with red hot labour market and with wages rising 5.2% y/y they will be prompted to take a more hawkish stance and continue with rate hikes. They were trying to slow down and fully stop with rate hikes, however latest inflation and this job report should nudge them to continue with rate hikes. Canadian housing market will not welcome potential rate hikes with open arms.

JPY

A report showed up in Nikkei indicating that BOJ plans to raise its inflation forecast on January 18, The new forecast will show inflation at around 2% in FY (Fiscal Year) 2024. FY starts on April 1. Later during the week it was reported that PM Kishida will review inflation target with the new BOJ governor. November wage data saw average cash earnings post another increase, 0.5% y/y, They have been rising every month of the year. However, real wages, wages adjusted for inflation, continued to decline and plunged 3.8% y/y. Falling real wages and increasing inflation exacerbates cost-of-living crisis and is a real recipe for disaster.

CHF

SNB total sight deposits for the week ending December 30 continued to decline and came in at CHF539.2bn vs CHF542.7bn the previous week. The bank continues to sell its USD and EUR holdings. CPI data for December saw headline inflation continue to fall, coming in at 2.8% y/y vs 3% y/y in November, however core CPI continued to tick up as it came in at 2% y/y vs 1.9% y/y the previous month.

 

[katetrades]

Forex Major Currencies Outlook (Jan 16 – Jan 20)

BOJ meeting with a small chance of widening YCC target or full removal of it will be the highlight of the week followed by China Q4 GDP, inflation from the UK and Canada, employment data from the UK and Australia and consumption data from the US. Monday is Martin Luther King day, banks will be closed in the US and liquidity will be lower.​

USD

December inflation data came in line with expectations. Headline number at 6.5% y/y, down from 7.1% y/y in November and -0.1% m/m. Core number came in at 5.7% y/y, down from 6% y/y the previous number and 0.3% m/m. Energy prices saw biggest declines (fuel oil and gasoline especially), prices of used cars and new vehicles also declined. Food prices rose 0.3% m/m with index for eggs rising 11.1% m/m. Shelter increased 0.8% m/m. It is a lagging indicator and it will continue to stay elevated due to hot housing market in 2022. Core services, ex shelter are the main focus of Fed due to wage costs. The reading today has all but settled a 25bp rate hike at February meeting.

The yield on a 10y Treasury started the week and year at around 3.6%, fell after the CPI report below 3.43%, then rebounded and finished the week at around 3.5%. The yield on 2y Treasury reached 4.29% during the week and fell after the CPI report below 4.12%, then rebounded and finished the week at around 4.16%. Spread between 2y and 10y Treasuries started the week at -68bp and tightened slightly to -67bp. FedWatchTool sees the probability of a 25bp rate hike in February at 92.2% with a probability of a 50bp rate hike at 7.8%.

This week we will have consumption data.

Important news for USD:

Wednesday:

• Retail Sales

EUR

ECB showed in its economic bulletin that wage growth should be very strong in the coming quarters as cost-of-living crisis intensifies and unions demand higher wages in the upcoming wage negotiations. In the future, however, expected economic slowdown will have negative impact on wages pushing them down. ECB policymaker Rehn commented that rates will need to go significantly higher with ECB policymaker De Cos echoing his statement. ECB policymaker Holzmann stated that their determination will not change until core inflation peaks. He added that the terminal rate could be reached by the summer and expressed caution regarding moving too quickly on quantitative tightening. Probability of a 50bp rate hike at February meeting is around 76%.

ECB’s economic bulleting for December sees headline inflation falling to 2% target in H2 of 2025. Inflation is seen at an averaging 8.4% in 2022, 6.3% in 2023, 3.4% in 2024 and 2.3% in 2025. Core HICP inflation is seen staying above 2% over that time horizon. Inflation risks are seen as tilted to the upside.

GBP

BOE Chief Economist Huw Pill stated in a speech that rising food and energy prices, due to the war in Ukraine, have driven inflation higher and a shortage of workers in the economy has contributed to more inflation. He added that Monetary Policy Committee is acting to bring inflation back down in the months and years ahead. His strong commitment to bringing inflation down was interpreted as hawkish by markets who now see almost 70% probability of a 50bp rate hike at February meeting. BOE member Mann confirmed that more rate hikes are to come and added that there is no risk of over-tightening at the moment. She is a more hawkish member. November GDP came in at 0.1% m/m vs -0.2% m/m as expected which could help Q4 GDP come in flat or slightly positive. That will push back inflation into Q1 of 2023 and coming recession may prove milder than feared. That would explain hawkish stance by BOE members and continuation of rate hikes.

This week we will have employment and inflation data.

Important news for GBP:

Tuesday:

• Claimant Count Change
• Unemployment Rate

Wednesday:

• CPI

AUD

Retail sales data for November improved 1.4% m/m from upwardly revised October reading of 0.4% m/m and 0.6% m/m as expected. Monthly CPI reading saw inflation rise to 7.3% y/y in November after a 6.9% y/y print the previous month. Motor fuels, holidays, recreation and fruits and vegetables were pushing inflation higher while alcohol and tobacco as well as clothing had negative m/m prints. Monthly CPI does not encompass full CPI basket, so the reading may be distorted, however it still shows inflation moving in unwanted direction which will prevent RBA from pausing at February meeting. Consensus is for a 25bp rate hike.

Inflation data for the month of December printed two up ticks. CPI came in at 1.8% y/y vs 1.6% y/y in November while PPI printed -0.7% y/y vs -1.3% y/y the previous month. With price pressures nowhere to be seen PBOC may freely engage on monetary loosening policy in order to stimulate economy after lockdowns. PPI showed third straight deflationary reading. December trade balance data saw surplus increase to $78bn. Exports fell 9.9% y/y, expectations were for a bigger decline of 11.1% y/y, while imports fell 7.5% y/y. In Yuan terms exports fell 0.5% y/y making it the first negative reading since beginning of 2020.

This week we will have employment data from Australia as well as Q4 GDP, industrial production and consumption data from China.

Important news for AUD:

Tuesday:

• GDP (China)
• Industrial Production (China)
• Retail Sales (China)

Thursday:

• Employment Change
• Unemployment Rate

NZD

Kiwi had a quiet week as all eyes were on the USD. Better news coming from China kept it stable against EUR and GBP while it managed to make gains against weak USD and CHF during the week, but the weak bank earnings pushed the Kiwi down as a part of risk-off mood in the market. NZDJPY was the biggest mover to the downside of all NZD pairs.

CAD

Building permits for the month of November rose by 14.1% m/m after a plunge of 5.3% m/m in October. CAD has not benefited greatly from rising Oil prices. It stood its ground against the EUR and GBP while it gained against weak USD and CHF. CADJPY was the biggest mover to the downside of all CAD pairs.

This week we will have inflation data.

Important news for CAD:

Tuesday:

• CPI

JPY

December inflation data for the Tokyo area saw headline number continue to rise and come in at 4% y/y vs 3.8% y/y in November. It is a new 40-year high. Ex fresh food component also printed 4% y/y, up from 3.6% y/y the previous month. Ex fresh food and energy, so called core-core, came in at 2.7% y/y, up from 2.5% y/y in November. Both core and core-core measures have been steadily rising since February of 2022 and trend is set to continue in the coming months. BOJ Governor Kuroda is to retire in April and newly appointed BOJ Governor may take a firmer stance on inflation and tighten monetary policy as a result. Household consumption in November fell 1.2% y/y for the first drop in 6 months. The drop was attributed to lower spending on food.

This week we will have a BOJ meeting. Majority of surveyed economists expect no change at the meeting, but considering last meeting’s sudden change in YCC (Yield Curve Control) there is a growing feeling that entire YCC could be abandoned at this meeting.

Important news for JPY:

Wednesday:

• BOJ Interest Rate Decision

CHF

SNB total sight deposits continued their downward trajectory in the new year and for a week ending January 6 came in at CHF533.5bn vs CHF539.2bn the previous week. The bank is selling USD and EUR in order to strengthen CHF to fight inflation. Swiss labour market continues to tighten with seasonally adjusted unemployment rate in December ticking down to 1.9%.