FX Weekly Update – November 27th, 2023

Posted Under: Weekly updates

The main market movers were the PMIs of business activity in the Eurozone and the UK, the former remained weak, while the latter was stronger than expected and moved back into expansionary territory. As a result, sterling traded higher against both the euro and the US dollar, while outperforming most other G10 currencies. Emerging market currencies flopped around without any clear trend or themes, mostly ending the week within 1% or less of where they had started it. This week, attention should shift back to data, particularly upcoming inflation prints. The Eurozone Flash inflation numbers for November will be released on Thursday, the same day as the US personal consumer expenditures (PCE) inflation report for October. In the absence of major central bank meetings, we’ll get a slate of speakers from the Federal Reserve, the Bank of England and the ECB. The question for the FX market is whether the sharp sell-off in the dollar can continue in the absence of clearer signs of economic strength outside of the US. We think it may have fallen too much, too quickly.

GBP: The PMIs of business activity posted a significant positive surprise in the UK last week. The overall index rebounded above the 50 level that indicates business expansion, a marked contrast with the gloomier numbers published across the Channel. Modest expansion, sticky inflation and the fiscal stimulus announced by the government’s recent announcements probably means that the Bank of England will be reluctant to lower rates any time soon.

As tends to be the case, last week’s budget announcement yielded little volatility in markets, as the policy tweaks unveiled were either largely as expected, or seen as having little to no impact on the outlook for the UK economy. The latest OBR growth forecasts for 2024 and 2025 were, however, revised rather sharply lower from March, suggesting that the period of rather fragile expansion is here to stay. Sterling largely ignored these gloomy projections, and rose against most major currencies last week. We think that it has room to continue to do so against the euro

EUR: The flash PMI numbers in the Eurozone continue to point to an economic contraction in the fourth quarter, which would confirm a technical recession after the negative print for the third quarter. The European Central Bank looks for some relief from the gloom in this week’s November flash inflation report, which is expected to show yet another significant fall in both the headline and core indices, to just below 4% in the latter case.

Regardless of the outcome, the euro’s rally against the dollar so far this month will be difficult to maintain unless the Eurozone economy starts showing signs of life. Indeed, concerns surrounding the state of the bloc’s economy appear to be the main culprit behind that underperformance in the euro last week, which ended more-or-less unchanged against the broadly weaker US dollar, and depreciated against all of its G10 peers, save the Japanese yen.

JPY: The yen was the clear underperformer in the G10 last week, selling off rather sharply against all of its major counterparts. A push back in market expectations for Bank of Japan policy normalisation continues to weigh on JPY, keeping it pinned just below the 150 level on the US dollar. Communications from BoJ members have remained pretty dovish of late, and swaps are now assigning less than a 50% chance of a rate hike in the first quarter of 2024 following last week’s CPI data, which saw a drop in the critical ‘core core’ inflation rate to a 7-month low 4% (from 4.2%). We continue to see the yen as oversold, particularly given our expectations for an earlier start to BoJ policy tightening than markets are currently pricing in. This view may change, however, should upcoming activity data surprise to the downside. The October retail sales report will be released on Wednesday, followed by the latest unemployment data on Thursday.

CAD: Further evidence of an easing in Canadian inflation was not enough to hold back CAD last week, as a strong retail sales report allayed fears over the state of the country’s economy. September retail sales posted the largest monthly increase since April (+0.6%), after investors had expected flat growth, with an even larger boost expected in October. It may be difficult for the Canadian economy to post anything more than modest growth in the third quarter, although last week’s data should, at least, calm fears that a technical recession may be on the way.

We won’t have to wait long to find out, with the Q3 GDP report set for release on Thursday. A strong GDP report, and a solid month of job creation in Friday’s November labour data, appears highly unlikely to be enough to put the possibility of another BoC rate hike back on the table. It could, however, prevent the BoC from signalling that its hiking cycle is completely over at its December meeting, which may be bullish for CAD.

CNY: Last week was one of the best for the Chinese currency in recent months. CNY jumped nearly 1% against the US dollar and outperformed most other currencies, ranking third among the emerging market currencies that we cover. Some of this outperformance could be due to China’s own design – the major state-owned banks have been reportedly buying yuans in order to prop up the currency. Even so, sentiment towards China has taken somewhat of a turn for the better of late, as authorities appear to be moving towards providing financing assistance to the distressed real estate developers, while economic data proves somewhat more resilient than thought. Data releases this week, particularly the PMIs, will test the latter. The statistics bureau will release the business activity data for November on Thursday, with the manufacturing PMI from Caixin to be published the following day.