Written by Convera’s Market Insights team
Markets underwhelmed by China
George Vessey – Lead FX Strategist
An underwhelming start to China’s keenly watched week-long annual parliament, coupled with a weak Wall Street close on Monday, kept risk assets on the back foot going into Tuesday, with the very notable exception of Bitcoin – eyeing record highs. The US dollar is steady across the board but its strength has moderated since the start of the year as we head into an action-packed week, which kicks off today with a slew of US data.
A more than 2% tumble in Hong Kong’s Hang Seng index was a good barometer of the market mood after Beijing kept its 2024 growth target at an ambitious 5%, a budget deficit of 3%. Markets hoped more concrete stimulus measures would emerge, only to be left disappointed with a question mark still hanging over China’s growth outlook this year. FX markets continued to range-bound trade with the Chinese yuan little changed and Aussie dollar under pressure. Cross-asset volatility overall remains in the doldrums having trended down for almost two years now. Our own index on realised 30-day FX volatility has fallen to the lowest since the end of 2021. However, despite volatility being so low, the net bet on the dollar, now the highest-yielding major currency, and which could be regarded as the safest carry trade, is just $2bln, in a sign that the carry trade hasn’t played out as favourably for the US dollar as one might expect. Still, the buck is the best performing major currency year-to-date.
This week’s macro data definitely has the potential to shake things up a bit as traders await US factory orders and the ISM services PMI today to assess the health of the US economy. On Wednesday, we see the ADP report, JOLTS job openings, and the Fed Beige Book and Fed Chair Powell will deliver his semi-annual testimony to Congress before the critical US jobs report is published on Friday.
Sterling stumbles after retail sales miss
George Vessey – Lead FX Strategist
Retail sales in the UK rose 1% on a like-for-like basis in February 2024 from a year ago, slowing from a 1.4% gain in January and coming in way below forecasts for a 1.5% growth as bad weather and persistent cost of living pressures dampened consumption. February’s figure was also the lowest since August 2022 and GBP/USD once again recoiled from the $1.27 handle ahead of big week of data and events that could shake up markets.
Stability across financial markets has prompted investors to take on more risk in search for a greater return, hence equities hitting record highs every week for the last seven and Bitcoin up 60% in about a month. The higher-yielding pound has been attractive, with net bets on GBP rising equivalent of $3.7bln, but the spot rate of GBP/USD has oscillated in a narrow sideways fashion since the start of the year, with global equity indices leaving it for dust. The pound has arguably, then, only slightly benefited from the low volatility levels and risk taking that we’re witnessing. GBP/USD implied volatility is plumbing levels not seen since before the pandemic in early 2020 and GBP/EUR implied volatility to 17-year lows. With the Bank of England (BoE) expected to deliver less rate cuts than its major peers over the next two years, the pound retains an attractive yield appeal relative to its peers, but the overstretched long GBP bets might be limiting its upside potential.
The market mood can change at the drop of a hat, and fresh tax cuts by the UK Chancellor tomorrow could apply some upward pressure on yields, which are near 15 year highs already, and could add further incentive for the BoE to keep interest rates on hold a little longer, which could prove constructive for sterling.
EUR/USD gains after upbeat Eurozone data
Ruta Prieskienyte – FX Strategist
It has largely been a risk-on start to the week packed with central bank events and major data that will refine market bets for when developed world interest rates will finally start falling. EUR/USD surged to a 1-month high, past the $1.08500 mark, as investors anxiously await the European Central Bank’s upcoming monetary policy meeting due this Thursday.
On macro data front, the latest Sentix index print revealed that Eurozone investors’ morale improved for the fifth month in a row in March. The Investor Confidence Index rose from -12.9 in February to -10.5, reaching its highest level since April 2023. Meanwhile, current situation and future expectation indices continue to improve in tandem. Despite the aggregate data moving in the right direction, there can be no talk of a spring revival for the common bloc. As the rest of the region to recovers, Germany remains the sick man of Eurozone. The recession remains in place for now and data is deteriorating even at persistently weak level. Surveys remain downbeat, with consumer confidence taking a turn for the worse, while high-frequency industry data show signs of picking up after the terrible end to 2023. Oxford Economics forecasts Germany’s GDP to contract by 0.1% in 2024, with gradual improvement of 1.4% annual GDP growth projected in 2025.
In forex markets, EUR/USD movements have been largely contained near the mid-point of the $1.0790-$1.0890 zone since mid-Feb as FX option implied volatility continues to probe multi-year lows amid a lack of actual and expected FX realised volatility. Markets are hoping this week’s key risk events will inject some action into an otherwise sleepy March. However, unless there are signs of a potential policy divergence, the low volatility environment looks set to persist. The euro edged lower to the $1.0830 mark against the US dollar as investors enter a wait-and-see mode ahead of a raft of global inflation data for insights into when central banks might commence easing policy. Germany’s 10-year bond yield advanced to 2.46%, staying below a three-month high of 2.5% reached earlier this month, while Germany’s DAX stock index extended its strong momentum to a new record high, outperforming other European benchmarks amid strong corporate earnings.
CAD touches a fresh 11-week low
Ruta Prieskienyte – FX Strategist
The Canadian dollar weakened past $1.3580 against its US counterpart on Monday, its lowest point since mid-December, as oil prices fell and investors await an interest rate decision this week by the Bank of Canada. Canadian government bond yields moved higher across the curve, tracking moves in US Treasuries, while the S&P/TSX Composite index closed flat on Monday’s trading session.
FX market volatility remains suppressed, given no sign of major central banks adjusting policy rates anytime soon. Money markets expect the BoC to leave its benchmark rate on hold at a 22-year high of 5% on Wednesday but to begin an easing cycle in June with a 75% probability as the domestic economy slows and inflation cools. Market participants will be closely observing the rate decision announcement as a dovish statement could weigh negatively on the Canadian dollar.
Looking ahead, investors will be keeping an eye on Canada’s S&P Global PMIs and US ISM Services data. Neither of the data releases are expected to be particularly market moving as investors remain cautious ahead of this week’s central bank meetings and US dollar remains bid ahead of tomorrow’s congressional testimony by Fed’s Chair Jerome Powell.
Gold surged by over 4% in a week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 4-8
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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.
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