Forex Major Currencies Outlook (Nov 7 – Nov 11)

USD

ISM manufacturing PMI for the month of October came in at 50.2 vs 50 as expected and down from 50.9 the previous month. Digging into the details of the report prices paid fell below 50 indicating easing price pressures while drop in supply deliveries indicates faster delivery times. Production, employment and new orders all showed increases, although new orders still remain below the 50 level. New export orders declined as demand from overseas is drying up. Backlog of orders dropped into contraction showing that number of incoming orders is declining rapidly.

Fed has delivered expected 75bp rate hike, fourth in a row, and moved the Fed funds rate in the range of 3.75-4%. Opening statement contained the hint of much awaited “pivot”. It said "In determining the pace of future increases in the target range, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation and economic and financial developments." Markets rolled with it and pushed USD almost 100 pips against the majors as equities rallied.

Fed Chairman Powell told a different story. At the press conference he stated that we will have a slower pace of rate hikes, but terminal rate will be higher. He stated that that Fed still has a long way to go. This reversed the fortunes in the markets as repricing was on and USD started to gain erasing all losses mad just half an hour ago. Powell added that window for soft landing is narrowing but it is still possible to achieve it and that they are aware that strong dollar is hurting other economies, but nevertheless terminal rate will still go higher. Inflation is still the main concern and Chairman said repeatedly that Fed has the tools and that they will bring it down to 2%. With cumulative interest rates totaling 375bp in 2022 we can expect that this was the last 75bp rate hike and that December will be a 50bp rate hike.

ISM non-manufacturing PMI came in at 54.4 vs 55.5 as expected and down from 56.7 in September. Prices paid and supplier deliveries components increased indicating growing inflation pressures and weakening of supply chains. The report showed drop in employment, going below 50, as well as drop in new orders and increase in inventories. New export orders plunged hard as combination of strong USD and weak foreign demand hurt the index. Details of the report point to the fact that Fed’s tightening process is showing results which in turn could lead to short-term USD weakness.

NFP headline number for October came in at 261k vs 200k as expected. However, good news stopped there. The unemployment rate ticked up to 3.7% with participation rate sliding to 62.2% from 62.3% in September. Underemployment (U6) rate ticked to 6.8% from 6.7% the previous month. Average hourly earnings rose 0.4% m/m and 4.7% y/y vs 0.3% m/m and 5% y/y in September.

The yield on a 10y Treasury started the week at around 4.05%, fell during the week below 4% and then climbed back above it after the Fed meeting. The yield on 2y Treasury reached 4.7% during the week. Spread between 2y and 10y Treasuries started the week at -43bp and widened to -61bp. FedWatchTool sees the probability of a 50bp rate hike in December at 56.8% with a probability of a 75bp rate hike at 43.2%.

This week we will have Midterm elections and inflation data for October which is expected to show a small tick down in headline reading.

Important news for USD:

Tuesday:

• Midterm Elections

Thursday:

• CPI

EUR

Preliminary September CPI data for the Eurozone crossed firmly into double digits with a 10.7% y/y reading, up from 9.9% y/y in August. Headline inflation increased 1.5% m/m vs 1.2% m/m the previous month. Energy prices were the biggest contributor to rising prices, followed by increases in prices of food and imported industrial goods. Core inflation rose 5% y/y vs 4.8% y/y in August. With core inflation continuing its upward trajectory ECB may be pushed to continue hiking even after President Lagarde sounded more dovish at the last press conference. ECB President Lagarde stated that recession alone is not enough to bring inflation down. Her statement can be interpreted as ECB’s intent to continue hiking rates even as economy crashes. Eurorzone managed to avoid recession is Q3 as GDP came in at 0.2% q/q.

GBP

Final manufacturing PMI for the month of October was revised up to 46.2 vs 45.8 as preliminary reported. Output, new orders and new export orders are declined. Inflation in the UK and around the world is killing both domestic and foreign demand. Surging energy costs and weak pound are main concern for the manufacturers according to S&P Global. Services were also revised up to 48.8 from 47.5 as preliminary reported which lifted composite to 48.2 from 47.2 as previously reported. New orders and new export orders are shrinking along with business optimism which is now at weakest since April of 2020.

BOE delivered a 75bp rate hike bringing the rate to 3%. The decision to hike rate was unanimous (9-0), but one member voted for a 25bp hike and other for a 50bp rate hike. More rate hikes are to come in the future but they will be not go as high as 5.20% as market is currently pricing in. Bank members noted that financial conditions tightened significantly since August and that 75bp hike is made in order to reduce risk of unnecessary tightening later on. Inflation is now expected to peak at 11% in Q4 of 2022 which is lower than anticipated in August. CPI is expected to start dropping from early next year. It is expected to fall below the 2% target in two years’ time, and further below the target in three years’ time. Projection for Q3 GDP was revised down while estimate for a 2022 GDP was revised up.

This week we will get Q3 GDP data.

Important news for GBP:

Friday:

• GDP

AUD

RBA has delivered a 25bp rate hike as was widely expected thus bringing the cash rate to 2.85%. Inflation is now expected to peak at around 8% later in the year. Medium-term inflation expectations remain well anchored and bank’s forecast is for CPI inflation to be around 4.75% over 2023 and a little above 3% over 2024. Economy is growing at a solid pace but will moderate in 2023. “The Bank’s central forecast for GDP growth has been revised down a little, with growth of around 3 per cent expected this year and 1½ per cent in 2023 and 2024.” Labor market remains tight and wages are picking up. The bank expects the unemployment rate to rise little above 4% in 2024 as economic growth slows. They have also acknowledged that higher interest rates and higher inflation are putting strains on household budgets. There will be more rate hikes to come and they will depend on incoming data as well as bank’s assessment regarding inflation and labor market.

Official PMI data from China for the month of October fell into contraction. Manufacturing came in at 49.2, non-manufacturing at 48.7 and composite at 49. New orders and new export orders continued to decline. Caixin manufacturing also printed 49.2, however it improved from 48.1 in September. It also saw declines in output and new orders. Caixin services slumped further to 48.4 and composite to 48.3.

This week we will get trade balance and inflation data from China.

Important news for AUD:

Monday:

• Trade Balance (China)

Wednesday:

• CPI (China)

NZD

Q3 employment report was a strong one with employment change going up 1.3% q/q vs being flat in Q2. The unemployment rate remained at 3.3% while participation rate saw a huge jump to 71.7% from 70.8% the previous quarter. Additionally, wages were increasing on a yearly basis, but were coming down on a quarterly basis.

CAD

BOC Governor Macklem stated in front of the Parliament that policy rate is expected to rise further, the pace and target will depend on how monetary policy is performing. He added that inflation measures have stopped rising but they are still not falling. He character\sed 50bp rate hikes as not normal but a big step and stated that they are still unsure whether next rate hike will be a big step or it will allow for return to normal steps.

October employment report was a stellar one. Employment change came in at 108.3k vs 10k as expected, a 10 times higher number! The unemployment rate remained unchanged at 5.2% while participation rate ticked up to 64.9% from 64.7% in September. Wages rose 5.5% y/y vs 5.2% y/y the previous month. All of new jobs created were full-time jobs (118.3k) while part-time jobs declined (-11k). Combination of very tight labor market and rising wages may push BOC toward a big step rate hike at the next meeting.

JPY

Preliminary September industrial production data showed a decline of -1.6% m/m with 4.5% y/y vs 5.8% y/y in August. Consumption fared much better than production for the same period as it rose 1.1% m/m and 4.5% y/y. Ministry of Finance admitted that they have spent JPY6.3 trillion ($42.5bn) in the month of October on currency intervention.

CHF

SNB total sight deposits for the week ending October 28 came in at CHF581.6bn vs CHF597.6bn the previous week. The bank continues to sell euros and dollars as investors move their funds away from the central bank. SNB reported that its loses totaled CHF597.6bn for the nine month period since the beginning of the year. A deadly combination of rising interest rates and Swissy strength caused losses on bank’s foreign investments. October CPI came in at 3% y/y vs 3.2% y/y as expected and down from 3.3% y/y in September. A second consecutive month of declines as inflation slowly moves toward SNB’s target. Core was steady at 1.8% y/y.

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_{Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.}