Forex Major Currencies Outlook (Dec 19 – Dec 23)

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.

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