Written by Convera’s Market Insights team
Dollar continues to suffer, with stocks at 22-month highs
Boris Kovacevic – Global Macro Strategist
The US dollar continues to suffer from the consequences of investors pricing in four rate cuts by the Federal Reserve for 2024 following a disappointing labor and inflation report over the past few weeks. The Greenback has given back more than half of its gains since the July rally and is now trading at a 2 ½ month low. With global risk sentiment soaring and the tech-heavy Nasdaq pushing to 22-month highs, after having risen by 14% in just four weeks, investors have started pushing away from the US dollar.
Given the lackluster economic data releases this week, there seems to be little reason for investors to turn cautious. It seems that markets are pricing in a goldilocks scenario in which the US economy avoids a recession while inflation continues to moderate. However, leading indicators have been deteriorating in recent months and have highlighted the downside risks to this scenario. The Leading Economic Index has not grown for 20 consecutive months now and is suggesting elevated recession probabilities. On average, the Fed cuts its policy rates 7-8 months after concluding its tightening cycle with the US falling into recession shortly after that. So far, the US economy has held up well against the pressure of higher yields. Still, we remain cautious regarding the soft-landing narrative.
Looking at the day ahead, secondary data points like existing home sales and the Chicago Fed Activity Index will be watched over the course of the day with the release of the FOMC meeting minutes defining the highlight of the day and probably the whole week. USD/JPY (¥147.40) is on track to fall for four consecutive days and is now 2.9% away from its multi-year high reached at the end of October. The same applies for the USD/CNY (¥7.13) currency pair, which is likely to set the record for the worst two consecutive weeks of this year.
George Vessey – Lead FX Strategist
Boosted by sustained global risk appetite, sterling has extended its gains beyond $1.25 versus the US dollar to hit a fresh 9-week high. Lower Treasury yields have led the dollar broadly lower against most currencies, but the pound has also been buoyed by a modest rise in gilt yields this week. Hence, GBP/EUR has managed to rebound from 6-month lows near €1.14.
The rise in UK gilt yields was triggered by Prime Minister Rishi Sunak who stated his government would turn to cutting tax after a fall in inflation. The statement comes head of tomorrow’s budget update when finance minister Jeremy Hunt is expected to announce how he will speed up the stagnant economy. Meanwhile, data this morning showed UK public sector net borrowing, excluding banks, stood at £14.9 billion in October, exceeding the market forecast of £13.7 billion. This marks the second-highest borrowing in October since recording began in 1993, providing a timely reminder that the task of restoring the public finances to a sustainable footing is far from complete.
Although the Autumn Statement is rarely a market-moving event, we’ll keep a close eye on the details tomorrow as it could influence Bank of England interest rate expectations too and drive sterling volatility. Further GBP/USD upside is looking promising though, especially given the widening gap between the pair and the S&P 500 recently. So long as the currency pair stays above its 100- and 200-day moving averages, we look for a test of $1.26 this week.
German data supports upward euro momentum
Ruta Prieskienyte – FX Strategist
The euro continued to reap benefits from an ongoing optimism that US rates have now indeed peaked. EUR/USD has touched a fresh 3-month high above $1.0950, extending on last week’s rally. Meanwhile, the common currency posed sizable losses against fellow oil exporting G10 nations, losing 0.75% against Norwegian krona, as WTI crude futures advanced higher ahead of an OPEC+ meeting, where the group is expected to deepen supply cuts to support oil prices.
Yesterday’s data revealed that German producer prices declined for the fourth consecutive month in October, falling by 11% y/y, largely due to base effects. Excluding energy and electricity components, the index grew by 0.2% y/y, indicating that the German PPI deflation has bottomed. As PPI is a reliable long term leading indicator for Consumer Price Index (CPI), we expect the headline CPI to continue falling over the upcoming months. Meanwhile, in its monthly economic report Bundesbank expects that Germany is headed for another poor quarter. Suffering a deep industrial recession, Europe’s largest economy recorded quarterly economic growth just once this year and indicators in the final three months of the year have mostly surprised to the downside. The bank expects the German economy to shrink again in Q4 and its recovery to be “arduous”, even if there are some signs an improvement could come early next year.
Looking ahead, while today’s calendar is light with data releases, it is spoilt for choice with ECB speeches. President Christine Lagarde is to make an appearance in Berlin today and will speak again at an event in Frankfurt on Friday, while the board member Isabel Schnabel is also due to make an appearance. Both policymakers have conveyed hawkish remarks, and the President specifically urged the need to refrain from rate-cut chatter over the next two quarters. A shift in sentiment towards discussions about interest rate cuts could affect the buying appetite for EUR/USD over the coming days. However, markets are likely to be preoccupied with the FOMC minutes later today, so increased volatility around these events is not expected.
CAD awaits CPI print
Ruta Prieskienyte – FX Strategist
The Canadian dollar is struggling to make any headway despite broad US dollar weakness against the major G-10 currencies. The recent decline in WTI crude oil prices weighed on the Loonie in the past few days. However, since Friday, crude oil prices have rebounded, providing no additional momentum to the Canadian Dollar. USD/CAD is trading around $1.37 on Tuesday morning and the Canadian dollar has lost over 1.7% value against the Japanese yen since Friday’s close but remains 3.7% above the YTD average.
Canada’s Consumer Price Index (CPI) data is set to be released later today. The year-on-year inflation rate in October is anticipated to have reduced to 3.2% from the previous reading of 3.8%. A fall in CPI could provide the Bank of Canada (BoC) with room to keep its target for the overnight rate unchanged at 5.0% during its December 6 meeting, especially as the central bank has signalled that rate decisions will be influenced by the economic indicators. This would be welcome news for the central bank and not necessarily negative for the Canadian Dollar given that higher interest rates and a deteriorating economic outlook are not an attractive combination. A higher-than-expected reading that triggers expectations of further tightening could boost the Canadian Dollar (Loonie), but such a reaction would be short lived. The market does not anticipate further rate hikes from the BoC, and according to the interest rate market, the probability of rate cuts stands at around 22% for March next year, increasing to over 62% by the April meeting.
Later today, the government will release its fall economic statement. The Liberal party has nearly doubled the country’s debt since coming to power in 2015, raising it to $1.10 trillion from $612.0 billion, which Justin Trudeau described as “exercising fiscal restraint.”
The Canadian dollar in red across board
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: November 20-24
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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.
