Written by Convera’s Market Insights team
Has Santa come early this year?
Boris Kovacevic – Global Macro Strategist
What a difference two weeks make. Global investors went into November against the backdrop of strong economic data and hawkish Fed speak having pushed US 10-year bond yields higher for six consecutive months to the highest level in 15 years at 5%. This drastic move set the tone for the rest of financial markets with the euro and pound falling to $1.05 and $1.20 respectively and the global equity index having fallen for three months in a row (-9%). However, November is shaping up to become the best month for risk assets this year in what investors have called a brought forward Santa Claus rally. The US dollar suffered its second-worst week (-1.9%) of the year with US equity benchmarks recording their third weekly gain in a row.
Three developments in particular have been responsible for the US dollar weakening and global stocks pushing higher in recent weeks. (1) G3 central bank deciding not to raise interest rates at their last meetings. (2) Signs emerging that the US labor market is cooling. (3) US, Eurozone and UK inflation surprising to the downside in October. Last week’s economic data continued adding fuel to investors’ speculations that the cooling of the US economy will stop the Federal Reserve from raising interest rates. Markets have priced out the possibility of monetary policy tightening in our G3 countries with global oil prices having fallen into bear market territory (-20% since October).
There is still a long way to go before the Fed starts to think about easing policy, but markets have sent a clear signal this week that the US dollar’s reign during the global tightening cycle is nearing an end. The influx of mostly weaker US economic data, led by a slowdown in inflation, bolstered bets that the Fed will cut rates by 100 basis points in 2024. The yield on the 10-year US Treasury note dropped below 4.4%, marking a two-month low. This dragged the US dollar to multi-month lows against many peers with standout weekly losses against the EUR (-1.7%), GBP (-1.7%) and AUD (-2.1%). This is the kind of price action may become more frequent as tight US rates finally play catch up with the US economy. More losses are on the horizon, not least because DXY is 13% higher than its 21st century average, but from a yield spread perspective, the dollar looks most vulnerable against JPY. We expect the USD to consolidate in the short-term, with flash PMI prints and FOMC minutes in focus next week ahead of the Thanksgiving holiday period.
Eyes on $1.25 ahead of Autumn Statement
George Vessey – Lead FX Strategist
Although much of sterling’s volatility has mostly been driven by US data over recent weeks, concerns about the resilience of UK household spending power have hindered the UK currency’s ability to strengthen against most peers bar the US dollar. This week, all eyes will be on UK chancellor, Jeremy Hunt, when he delivers his Autumn Statement.
Weak UK retail sales, cooling wage growth and a sharp decline in inflation has prompted money markets to raise bets of BoE rate cuts. Traders are pencilling in up to 80 basis points worth of easing next year, compared with a decline of just over 50 bps a week ago. The two-year UK-German yield differential fell to near 5-month lows dragging GBP/EUR to a 6-month low, just shy of €1.14. The currency pair is now trading below its key long-term daily and weekly moving averages and is 1.5% below its 2-year average. Downside risks towards €1.12 will likely increase if we close below €1.14. The rebound in global risk appetite overall though sent equities higher and allowed sterling to catapult to a fresh 2-month high against the US dollar and record its biggest daily gain since December 2022. GBP/USD sliced through its 200-day moving average and extended to $1.25, where it’s lingering near this morning.
The UK chancellor’s autumn statement this Wednesday will be a key talking point, as tax cuts could be hurried forward as the chancellor seeks to appease Tory MPs fearful of a 2024 election defeat. However, such fiscal updates don’t usually rock FX markets, hence November’s flash PMI data could be the main driver of volatility this week.
Euro above $1.09 for the first time since August
Ruta Prieskienyte – FX Strategist
The euro started the week with the biggest daily rally against the US dollar in 2023, surging past $1.08 for the first time in over two months, as investors dumped the US dollar after soft CPI data. This rally was extended during last week’s trading with the currency pair hitting the $1.09 mark. The pair is currently 4.4% above the October lows and has recorded the 2nd largest weekly gain in 2023. The plunge in brent crude prices at the end of the week helped the euro hang onto its early week’s advantage and sent EUR/CAD past 6-month highs.
The common currency was supported by promising domestic news as November German ZEW survey surprised to the upside. This was in line with the rise in recent Sentix and Ifo expectation survey and an overall rebound in risk assets. The European Central Bank remains on guard as the recovery attempt is still on shaky ground given the subdued outlook in the near term. However, two-year Bund yields are currently testing the 200-week average for the first time since March 2022.
Sentiment improved on the last day of trading as well for the euro, as rating agency Moody’s upgraded Italy’s credit outlook from negative to stable. That means that the country is not anymore in danger of a cut to junk, raising the outlook for Prime Minister Giorgia Meloni’s government. The Eurozone’s current account topped 40 billion in September as well, recording the largest surplus since July 2021. This week will bring the release of the purchasing manager indices, Ifo German business climate and Eurozone consumer confidence.
CAD down across board since last Monday
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.
