Forex Major Currencies Outlook (Jan 9 – Jan 13)

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.

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