Global overview
The US dollar index fell to three-month lows on Friday as markets continue to pin hopes on an end to the US’s rate-hiking cycle. The Aussie, kiwi, Sing dollar and Chinese yuan all reached three-month highs versus the US dollar.
USD index hits three-month lows
The US dollar ended the week lower, with the USD index at the lowest level in three months, as last week’s cooler than expected US inflation reading continued to drive expectations that the US Federal Reserve was at the end of its rate hiking cycle.
The USD index fell 1.9% last week in the second-largest weekly fall so far this year.
The Australian and New Zealand dollars remain the main beneficiaries of the greenback’s weakness with the AUD/USD up 0.6% on Friday and the NZD/USD up 0.3%. Both currencies remain stuck under technical resistance at the three-month lows, however.
The USD also remained weaker in Asia with the USD/SGD and USD/CNH similarly at three-month lows.
This week, most of the focus might be centered early in the week, with the US closed for their Thanksgiving holiday on Friday.
China’s loan prime rate on Monday, the US Fed’s minutes on Wednesday and the key purchasing manager indexes released on Thursday, are likely to be the highlight.
Commodities supported despite Chinese slowdown
Despite ongoing worries about a slowdown in Chinese growth, commodities have held on relatively well, and the CRB Commodity Index is only around 15% below the 2022 highs. China’s imports of commodities can be separated into three categories:
1) Underlying demand due to macroeconomic factors;
2) Countercyclical purchases driven by pricing effects;
3) Other unexplained import demand, perhaps related to stockpiles.
China looks to have been accumulating commodities this year, and that the growth in purchases of commodities exceeds what can be accounted for by price impact or economic factors. However, it is difficult to determine if the purchase is motivated by national security concerns, a strategic stockpile for future use, or the mitigation of inventory destocking or domestic supply-demand deficits.
We see directionality of CNY in Q4 as largely an extension of Q3’s negativity, although a number of technical forces could move the needle marginally in the direction of less bearishness on the currency. These include less acute pressure from core yield spikes and a better outlook for Chinese equities.
US yield curve offers more questions than answers
The only Fed tightening cycle that witnessed bear steepening after the last Fed raise (in which long yields outperform shorter yields) as opposed to the usual bull steepening (in which shorter yields outperform) seen in the previous Fed tightening cycles, was 1969.
By the end of this month, or around three months after the possible final Fed rise in July, the present bear steepening may theoretically be exhausted, if we use the 1969 Fed tightening cycle as a reference.
However, in the 1969 cycle, the recession after the last increase occurred three months later, indicating that the current bear steepening may persist until more distinct indications of a downturn in GDP are present.
While the greenback has been recently weaker, the outlook remains uncertain. On one hand, rising US rates and intensifying geopolitics are USD-bullish, while improving momentum in China and Europe and a less assertive Fed would typically be USD-bearish. For now, the USD remains broadly supported. The USD could gain from increased demand for safe haven assets in foreign exchange due to rising rates, and negative yield-equity correlations.
Greenback pressured after second-largest weekly loss for 2023
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 20 – 25 November
All times AEDT
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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.
