FX Weekly Report, 11th, December 2023

PERSPECTIVE

US labour markets remain tight and dominated currency moves in the past week. Data releases in the past week show US labour markets ticking back in the direction of tightness, from a baseline that was already very strong. This surprising and persistent resilience in face of sharp interest rate hikes over the past eighteen months is likely due to a combination of high aggregate demand arising from fiscal deficits running at nearly 6% of GDP, together with elevated savings-financed spending by US consumers. The surprise strengthening of the labour market caused a wide range of global currencies to slip against the dollar, with the notable exception of INR which held its ground due to reported central bank intervention. Interest rate policy meetings at the FED, ECB and BoE this week may cast further light on the likely direction of interest rate differentials and exchange rates over the coming months.

US DOLLAR

• In the past week, we saw the US Dollar index appreciate by 0.75% against a trade weighted basket of its peers. The DXY is now trading 0.5% higher year to date after another hugely volatile year.

• From a data point of view last week, markets were heavily concentrated on releases from the labour market. Early in the week we saw the JOLTs Job Openings release come in at a 2-year low, just a touch below 9M job openings. Compared to the long run rate, however, this is still far above pre-pandemic levels, suggesting the labour market remains tight.

• Moving on to the main release of the week, the Non Farm Payrolls, we saw an upside surprise with 199k new roles being added, against 160k as forecast. On top of this, the unemployment rate slipped to 3.7%, representing the first monthly drop since July. If we look at the long run rate for each, they are both pointing towards a very tight labour market.

• Following the Non Farm Payrolls report for November, FED futures markets saw big revisions for projections of future interest rate expectations. One week prior, markets had the chance of a cut in March at over 50%. As of Monday, we have seen a swing back to a 60% chance of rates remaining at 5.5%. As a result, we saw the US Dollar appreciate heading into interest rate decision week for the FED.

• Markets have fully priced in a hold this week from the FOMC, with rates expected to remain at 5.5%. Key prints before this, however, are the consumer and producer inflation readings on Tuesday and Wednesday. Headline inflation is expected to have dropped to 3.1%, with the core reading remaining at 4%. Producer inflation, a leading indicator, is forecast to drop to 1% on an annualised basis. These will be key figures ahead of the meetings and the highly anticipated press conference after.

• Recent comments from FED Chair Jay Powell suggest he is likely to rebuff recent repricing in FED futures markets geared towards predictions of cuts in 2024. Powell is set to restate that is premature to suggest interest rates have peaked or to begin scheduling timelines for rate cuts. Tuesday and Wednesday’s inflation readings will be of great importance to the tone of Chair Powell’s press conference. Markets will be looking for any signs of indicators required for the FED to begin discussing rate cuts.

ASIA-PACIFIC

• In China we saw the Renminbi weaken back to 7.16 vs USD last week after confirmation on Saturday the economy has fallen further into deflationary territory. Both the consumer and producer inflation readings for November surprised to the downside in a sign that recent economic stimulus packages haven’t had the desired effect on the Chinese economy. Trade data on Thursday showed a slight uptick in exports, albeit from extremely low levels. Imports, however, had a large downside surprise of -0.6% for November against +4.0% expected. The week ahead will be largely decided by the FED interest rate decision meeting on Wednesday. Key data releases on Friday in housing, industrial production, unemployment and retail sales may well move the needle in either direction.

• The Yen gained 1.5% against the dollar last week, mainly driven by hawkish comments from the central bank governor on Thursday, in which he spoke of pulling short term interest rates out of negative territory, and discussed several options for which interest rates to target in future. These gains were largely relinquished on Monday this week, after reports that BoJ officials had not seen enough evidence of strong wage growth to justify a change in policy. Markets now see the Thursday’s comments as not indicative of real policy intent.

• The Australian Dollar declined by almost 1% in the middle of last week but regained over half of this lost ground by the weekend. The sell off was driven by a strong US labour market data together with adverse expectations of upcoming confidence data.

SOUTH ASIA

• INR is holding steady close to 83.35 rupees to the dollar, amid reports that the Reserve Bank of India has intervened in the past few days, selling US dollars in order to stem depreciation of the rupee against the dollar, driven by US labour market data and slides in other Asian currencies.

• PKR is holding steady close to 284 rupees to the dollar in the official rate. This is driven largely by reports that staff-level agreement has been reached with the IMF on disbursing the next tranche of support for Pakistan, pending approval by the IMF board.

MIDDLE EAST AND AFRICA

• The Nigerian Naira remains highly volatile: huge dollar shortages have led to a 24% crash on official markets to end the week trading at 1,099 Naira to the US Dollar. President Tinubu has severely criticised former Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, for, allegedly, running the economy into the ground and mismanaging foreign exchange. Tinubu later suspended some of the initiatives put in place by Emefiele to stimulate domestic production as well as boost FX earnings. At the inception of the current administration, the naira stood at 462 to the US dollar at the official rate and 758 in the parallel market. We are now sitting well above those levels with the Naira depreciating daily. Another CBN intervention on the way?

• Kenyan Shilling was little changed last week in highly welcome news for the struggling currency. On Tuesday, the CBK raised interest rates to 12.5% which helped arrest the momentum in the slide of the Shilling. It remains to be seen if this will be enough to attract inflows into the country to help keep the Shilling from depreciating further against the Dollar. Growth figures released this week will give a good idea on the health of the economy.

• South African Rand ended the week trading 1.5% weaker against USD at 19.1. Strong US labour market data has pared bets on an early FED rate cut which has pushed flows away from all emerging market currencies. The week ahead is data heavy for South Africa with data releases for mining, manufacturing, retail sales and inflation. This teamed with the rhetoric from the FED will likely lead to volatility in the Rand in the week ahead.

EUROPE

• GBP slid by 0.6% against USD last week, denting but not reversing a strong run of gains starting in late October, driven primarily by data showing that the jobs market in the US remains strong, which boosted the dollar over the week. Multiple data releases lie ahead for the UK this week, ahead of a BoE interest rate decision on Thursday. Market expectations are that this will not fundamentally change the picture that BoE policy interest rates are likely to remain slightly higher for slightly longer than other major central banks, due to greater inflation stickiness in the UK. This bodes continued GBP strength.

• The Euro gave up approximately 0.5% against the dollar last week, for similar reasons to the pound: signs of continuing labour market tightness in the US and their implication that US policy rates will not come down in the short term, together with market expectations that are now pricing the probability of a quarter-percent interest rate cut at the March meeting of the ECB at 85%. Thursday’s rates decision from the ECB and the attendant policymaker comments may further inform traders’ expectations.

OTHER NEWS

• Argentina’s central bank is restricting access to dollars until incoming president Javier Milei’s administration announces its first measures on economic reform. The new president has promised sweeping reform and huge spending cuts in order to help reverse the country’s spiraling debt problems.

• Egypt’s Sisi is set to win another term as president of Egypt later this month. The election is set to be followed by another painful devaluation of the currency in early 2024 in order to gain access to further IMF funding to help its ailing economy.

PERFORMANCES AGAINST US DOLLAR

Information as of 11th December 2023 10.00 UAE time.

THE WEEK AHEAD

Monday, Dec 11th

· US Consumer Inflation Expectations

Tuesday, Dec 12th

· Australia Westpac Consumer Confidence

· Australia NAB Business Confidence

· UK Unemployment Rate

· UK Average Earnings

· US Inflation Rate

Wednesday, Dec 13th

· Japan Tankan Large Manufacturers Index

· UK GDP

· UK Industrial Production

· UK Manufacturing Production

· US PPI

· US FED Interest Rate Decision

Thursday, Dec 14th

· Australia Unemployment Rate

· UK BoE Interest Rate Decision

· EU ECB Interest Rate Decision

· US Retail Sales

Friday, Dec 15th

· China House Price Index

· China Industrial Production

· China Retail Sales

· China Unemployment Rate

· EU HCOB Composite PMI Flash

· US S&P Global Composite Flash