Written by Convera’s Market Insights team
Dollar tumbles as yields drop
Boris Kovacevic – Global Macro Strategist
Markets have survived two weeks full of rate decisions and tier one macro data and have emerged much stronger than expected. Central banks have paused their rate increases and the economic data has broadly disappointed, fueling bets on easier monetary policy in 2024. This has pushed down yields, paving the way for global equities to rebound strongly.
Global equities and long dated government bonds recorded their best week since November 2022 and March 2023 respectively with the S&P 500 up more than 5.8% on the week. The US Dollar Index has naturally continued to ease against the backdrop of lower yields and the capital rotation into riskier assets. The US 10-year Treasury yield is now trading around 50 basis points below its peaks (5.01%) reached two weeks ago at around 4.58%. Brent oil retreated for a second week to $88 with European gas prices falling to their lowest since the start of the war in the Middle East.
Treasury yields continued their descent following the non-farm payrolls report that showed that the US labour market added less jobs than expected in October, after a blockbuster print in September (336k). Jobs growth in October came in below consensus at 150k in line with our expectations and is fueling the risk rally that started earlier this week. This has pushed the markets expectation of another rate hike by the Fed this year to below 20% with the first cut being priced in for May 2024. The tailwind from strong US data had supported the DXY’s 7% rebound from 2023 lows over the past few months, but momentum is waning with the currency down around 2% from its October peak. We do expect the short end of the US curve to start moving even lower ahead of Fed easing next summer and therefore retain our bearish view on the dollar through 2024.
Euro starts week beyond $1.07
Boris Kovacevic – Global Macro Strategist
With the strong US Q3 GDP print (4.9%) out of the way and leading indicators dragging down expectations for Q4, we might be entering a phase of weaker US growth. This is a first sign of a potential macro regime shift. The last few months have been characterized by exceptional US growth compared to the rest of the developed world. The last week has made a dent in the armor of the US economy. However, we are still in the phase where European data continues to disappoint.
We continued to note that Eurozone data has been nothing but negative last week. The negative GDP print for Q3 (-0.1% vs. 0% exp.) and both Eurozone and German inflation falling much more than expected in line with our forecast have forced investors to bring forward rate cutting bets for the ECB well into H1 2024. The German labour market is also feeling the pressure from higher interest rates and the global manufacturing recession. Jobless claims rose for a ninth consecutive month, pushing the unemployment rate to 5.8% in October, the highest level since the middle of 2021. Going into next week, markets will most likely be driven by the lingering effect of the past two weeks and upcoming central bank speeches, as most tier one data points have already been published. Still, some secondary macro data could become market moving, if a narrative can be formed around them.
EUR/USD has oscillated in the $1.05-$1.06 band for over 70% of the past 30-days as the dynamic continues to be driven by the US counterpart for the lack of more cheerful domestic news. Having said that, the pair recorded the best week since early July as EUR/USD has pushed beyond the $1.07 level for the first time in nine weeks following disappointing US data and plunging US yields.
Pound records second best day of 2023
George Vessey – Lead FX Strategist
The pound showed surprising resilience following the Bank of England’s (BoE) decision to keep rates on hold last week, despite downgrades to UK GDP growth and 10-year gilt yields suffering their second worst week of the year. It was the bigger fall in US yields, accelerating after the US jobs report on Friday, which triggered the big moves in markets though, with GBP/USD soaring to 6-week highs towards $1.24, and clocking its second biggest daily rise (1.5%) of 2023.
Over the past two years GBP/USD has, on average, declined by almost 1% after a BoE meeting, but instead, the pound profited from a positive shift in investor sentiment amid optimism that we’re near the end of the global tightening cycle. Sterling also strengthened against other G10 peers, especially safe havens, but weakened against the risk-sensitive Antipodean currencies. Whilst sterling may continue recovering if the risk-positive environment persists or US economic data continues disappointing, we need to a break above the 200-day moving average, located at $1.2434, to boost upside momentum. Meanwhile, seasonality favours European data and the euro, so we see downside risks to GBP/EUR before year-end. However, we’re watching last week’s bullish rebound closely for signs of a decisive breakout from its 3-month downtrend.
We cannot ignore the weakness of the UK economy though, so this will likely limit the strength of any sterling recovery, particularly against the US dollar. On Friday this week we have UK GDP figures, which have been pretty volatile recently, but overall, third quarter GDP is expected to come in marginally negative. Going forward, we expect a period of stagflation, and note the risk of a mild recession remains elevated.
Disappointing CA jobs figures extinguish BoC hike hopes
Ruta Prieskienyte – FX Strategist
The US dollar retreated from 12-month highs against the Canadian dollar amid a broad pullback for the DXY as soft economic data from the US reduced Fed rate hike bets. The Canadian dollar strengthened to 1.36 per USD, rebounding sharply from the one-year low of 1.39 touched on November 1st.
While overshadowed by US NFP report on Friday, Canada’s employment data showed that the labour tightness continues to ease further. 17.5k jobs were added to payroll in the month of October, which was over three times lower than the last month’s reading and below the market expectations of 22.5k. The unemployment rate continued to rise further, increasing by 0.2bps to 5.7% – the highest level in 21 months. Wage growth also continued to slow, consolidating a marked softening for the Canadian labor market.
Weakening economic data domestically added to expectations of a less hawkish BoC and obstructed further appreciation for the Canadian dollar. In its latest meeting, the BoC held interest rates unchanged at 5% and steered more on the hawkish side amid mounting inflationary risks. However, the markets have almost entirely priced out the possibility of further rate hikes and put a 49.7% probability of a rate cut as early as July 2024.
Risk assets rally with Nasdaq up over 5%
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 06-10
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
