What Happened

• Per the Bloomberg Dollar Spot Index, the buck managed to stay afloat by a small margin as it lost value across the board.
• October proved to be a month of FX recovery and mixed ranges as risk events unfolded.
• Euro experienced its first monthly gain since May as some energy fears have subsided.
• Prime Minister Rishi Sunak is in after Liz Truss quit, making the shortest run ever of any PM.
• A few central banks signaled a need to consider slowing down pace of interest rate hikes.

GreenShootsFX’s View

• Any further news on China’s will to reopen and end Zero-COVID policies may lead to further USD deterioration.
• OPEC+ production cuts will keep oil prices wild as the White House seeks to counter the move in repudiation as it afflicts Europe.
• Sterling has already shown the ability to recover quickly and may have room to rise.
• Everyone will keep a close eye on central bank commentary that leads to believe a turnaround on tightening is coming.

In Focus

• October showed how inconsistent markets are behaving.

• A mix of feelings has taken over, with some still hoping for a short slowdown.
• Traders and investors are wondering if 2023 will be less turbulent or if the “worst is yet to come,” as the International Monetary Fund said.
• The IMF cut its global growth forecast to 2.7%, highlighting an unclear and uncertain path toward growth with the war going on.
• Nevertheless, equity participants got some relief as the Dow Jones climbed by 11.0%.
• The lack of guidance makes for high levels of volatility that contribute to difficulty in forecasting FX flows.

In Depth

Stubborn inflation and a resilient dollar keep markets weary of tightening. Central banks may indeed be limited in how much they can combat inflationary growth.

It seems like the price of living keeps going up. Following rounds of stimulus and accommodative policies from central banks, inflationary growth has been the boogeyman of the post-pandemic economy, which seems to be dragging because of the shocks to the supply chain caused by the medical emergency and exacerbated by the war that Russia started by invading Ukraine.

While not all is doom and gloom, volatility remains at record highs because of the lack of uncertainty over just what will come in 2023 that will make the economy healthier. If not, how much worse could things get?

The International Monetary Fund (IMF) was blunt in its assessment and described the current situation as worrisome, while other analyses point to how concerns over energy and contraction are easing.

Per recent Gross Domestic Product data and a few other gauges, the U.S. economy has proven to be resilient enough to withstand all the tightening and interest-rate hiking the Fed has conducted this year. Fed chairman Jerome Powell had made that point before until he also admitted that officials wanted to start causing a slowdown to cool price pressures that have refused to go away.

Domestically, the U.S. has been able to meet and work toward its goals while the rest of the world adjusts to the jump in the dollar’s value. However, invoicing for all kinds of assets and products is denominated in USD, making the cost of doing business precarious for many companies overseas as well as those here collecting less revenue than ever because of the exchange.

At various points in recent months, the idea of a collective reconsideration of FX values has been mentioned, but clearly opposed by the White House and other financial authorities. In Japan, the Yen fell to levels that were supposed to trigger another round of FX intervention, a costly endeavor that can be afforded by very few nations who must have strong reserves in holding. Nothing materialized, but the Bank of Japan has vowed to do all it can to promote stability without increasing interest rates and maintaining an eye on the yield curve.

The divergence in central bank policies has also created many headaches for bond markets, which have demonstrated a lack of faith in future policy and predict a turnaround in monetary policy next year. As inflation has continued to damage the economic outlook for many, traders and investors feel vulnerable and question the ability of central banks to impact prices. Perhaps even some decision-makers themselves are wondering if hikes can do much anymore.

The Reserve Bank of Australia’s decision early in the month to increase interest rates by 25 instead of 50-basis-points certainly dragged “Aussie” Dollar, while comments from RBA Governor Philip Lowe resonated with the exhaustion in markets: “the cash rate has been increased substantially in a short period of time.” Is it time to take a break?

It looks like the Bank of Canada would agree. At their decision meeting, the BOC slowed down its pace of hiking and only increased its benchmark rate by 50-bps instead of the estimated 75. Since their March meeting, the BOC has consistently added to borrowing costs, but Governor Tiff Macklem stated that “we are getting closer” to the end of the tightening cycle.

After writing this year about the effects that the pandemic inevitably had on the globalized system of trade we counted on for decades, we are now entering a bit of a transitionary period with relations for the U.S. and goals internationally being realigned. After all, the physical conflict in Ukraine has revealed deep divisions in world views and approaches to directing economic activity.

Following years of growing friction and disagreement over items like COVID and tariffs, the U.S. and China have seen their relationship grow sour. It has now come to the point where vision over the future of technology is not entirely shared, although manufacturing and design of tech have operated hand-in-hand between the two largest economies since the 1990s. Likewise, the quick pace of advancement in China is primarily due to the cooperation of ideas and business deals that have overcome diplomatic frustrations and failures.

The White House’s measures to cut off China from chip technology have been received with some understandable anger by Chinese officials who have vowed to retaliate. This also comes during a period when the U.S. is questioning its partnership with Saudi Arabia as well as other members of OPEC+ who refused to listen to President Joe Biden’s pleas for increased production to lower prices at the pump. In order to facilitate shipping and freight, which have sky-rocketed in price, the White House has tried using its global leverage without avail.

Over on the other side of the Atlantic, the EU is hoping to make up for a lack of Nord Stream flows with alternatives like propane and even Ethanol from Brazil. Meanwhile, the U.K. could turn face and become a closer partner to its neighbors as local introspection seems to regret voting for Brexit.