Forex Major Currencies Outlook (Oct 31 – Nov 4)

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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_{Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.}