FX Weekly Report, 27th, November 2023
PERSPECTIVE
A dollar correction. The economic story of the past decade has had dollar strength woven throughout it. On both a real and a nominal basis, the dollar has experienced a generalised upward trend since 2011 and is today almost 30% above its level on a trade-weighted basis a decade ago. Excitable market news outlets treat smaller wobbles as giant reversals and ignore this wider trend. But small corrections around a wider trend do matter, and the past weeks have seen the dollar slip as markets observe emerging signs of slowing in the US economy and place bets that the rate hiking cycle is over. In China meanwhile, there has been a cautious return of more-positive (or at least less-negative) sentiment relating to the economy and the currency. However it seems unlikely that all of the reported rottenness in the financial system and property sector will just go away, and these developments come against a backdrop of much greater political interference in business, with Party committees embedded in companies, the ‘social credit’ scores of individual business leaders, and other such measures exerting an influence unimaginable in more market-oriented systems and unlikely to be economically efficient. It seems improbable that serious volatility in China’s economic picture and financial markets is at an end. If China does stumble again, look out for the dollar to regain lost ground.
US DOLLAR
In the past week, we saw the US Dollar index depreciate by 0.5% against a trade weighted basket of its peers. The DXY has now dropped by 3.8% from its October peak of 107.3 as investors bet the FED has completed its rate hiking cycle.
The week was very light from a data point of view due to the Thanksgiving holiday in the US. The major market moving pieces of news were the FOMC minutes release on Tuesday and the Durable Goods release the following day.
The FOMC minutes release largely backed up the rhetoric in Jay Powell’s press conference following the rate decision itself. The majority of members of the rate-setting committee expressed great hesitation to raise rates again given current data. With a larger than expected drop in inflation and a slowdown in economic activity, attention now turns to the danger of perhaps having over-tightened.
The marked drop of 5.4% for Durable Goods orders in October showed the FED is correct in proceeding carefully in monetary policy decisions. With the effects of higher lending rates now beginning to bite, markets will have a keen eye on upcoming data for any further signs of a slowdown. In the coming week we will have more pricing and activity data which will give more indications on current conditions as we head into the holiday season.
Economic forecasters are much more divided than usual in their predictions for the US in 2024, with GDP growth forecasts from economics teams at the main Wall Street banks varying between 1.1% and 2.2%, inflation forecasts similarly mixed and overall expectations running the gamut between stagflation and disinflationary growth.
As things stand, there has been a large reversal with bets against the dollar increasing. FED Futures markets now have the chance of a cut at over 50% at the May 2024 meeting, up from 40% just one month ago. The sell-off in the dollar is consistent with markets anticipating a ‘soft landing’ scenario, with flows moving back to emerging markets and risk assets. A serious downturn in data would certainly cause a sharper fall. A volatile period for the world reserve currency looks to be the only certainty moving forward.
ASIA-PACIFIC
In China we saw the Renminbi strengthen against the Dollar once again, ending the week trading 0.8% higher at 7.15 vs USD. There were no data releases of note of China last week after they held rates steady at 3.45% on Monday. The move in the exchange rate was born out of dollar weakness and a general ‘risk on’ sentiment entering the market. The recent thawing of relations between the US and China will certainly also have had an influence in flows back to the Yuan over the past 2 weeks. There are still major concerns surrounding the economy and financial system, however, and markets will need convincing to see a large-scale reversal in currency strength. More news from the troubled shadow banking sector last week showed that shadow bank Zhongzhi is under police investigation following its announcement that it is ‘severely insolvent’. The shadow banking sector in China is huge and there is very little official data on it. Reports suggest it is heavily exposed to the struggling property market and is sat on a mountain of unsustainable debt. How this will affect the economy moving forward will be something markets track closely.
The Yen remained flat against the US Dollar last week, trading a touch above 149. A hotter than expected inflation reading on Friday did little to help the struggling currency. Another contraction in the Jibun Bank Manufacturing PMI suggests the domestic picture is still fairly weak. JPY holders can be hopeful, however, with the knowledge that the FEDs interest rate hiking cycle looks all but over. If the BoJ proceeds with it’s plan to move rates out of negative territory in early 2024, a case for JPY strength can certainly be made.
After a tough 2023, the Australian Dollar saw its second weekly gain against its American counterpart since June. The weakening US Dollar and reports of a potential improvement in US-China relations helped push AUD 1% higher against USD last week. On the other hand, data releases were largely disappointing last week out of Australia with manufacturing and services both showing contraction. The hope will be a reversal in Chinese data that will help push the Aussie back up towards the long run average of 0.7 against USD.
SOUTH ASIA
INR remained steady slightly weaker than 83 vs USD last week as the Indian economy continues to perform well despite a weak global picture. There as no market moving data last week out of India. All eyes will be on the growth and manufacturing data being released this coming week.
PKR ended the week trading 1% stronger at 285.0 against USD. There were no data releases last week, but in the coming week we have a key inflation print. This will give markets a sense of direction for the next monetary policy meeting.
MIDDLE EAST AND AFRICA
The Nigerian Naira remains highly volatile; a 12% depreciation on Friday in the official market has sparked calls for further CBN intervention. The depreciation of the Naira in parallel markets suggest there are fresh dollar shortages on the ground in Nigeria as the central bank struggles to keep up with its FX requirements and reports have emerged of major payments out of the country that could not go ahead. The government has pledged to punish banks hoarding dollars moving forward, although there has been no sign of this thus far. From a data point of view, the central bank will be very encouraged by the bumper 9.7% GDP growth rate reading for Q3.
Kenyan Shilling moved to fresh lows against the dollar last week as the country continues to battle against worsening dollar shortages on the ground. The CBK is struggling to meet forex demands for fuel imports, which is being exacerbated by demands from companies needing to repay dollar denominated debt. This pushed the Shilling down to 152.8 against USD on official markets.
South African Rand ended the week trading 2% lower against the dollar at 18.7. The Reserve Bank of South Africa opted to keep rates steady at 8.25% despite a hotter than expected inflation print on Wednesday. Markets will need to see a clear uptick in economic activity after a string of disappointing data released in the manufacturing and mining sectors as well as lower than expected retails sales.
EUROPE
GBP gained by almost 1% against the dollar over the week, extending an upward trend going back to the start of the month. This is partly just a corollary of the dollar weakening, but it is also driven by expectations that UK interest rates are less likely to fall than those in other major economies. UK inflation has fallen sharply but it remains higher than elsewhere and is running at more than twice the central bank’s official target of 2%. So, although UK growth forecasts have been revised downwards, the expectation is that the BoE will remain committed to its inflation target and keep rates high somewhat longer. Fiscal announcements from the Chancellor (finance minister) were broadly neutral in a macroeconomic sense but showed a more mature, methodical approach than his predecessors and so were likely positive for sterling.
The Euro fluctuated against the dollar over the week, ending it 0.4% higher. This was driven largely by the dollar weakening and consequent upticks in European asset indices, and comes despite comments from Christine Largarde, head of the ECB, pointing to softening of economic activity in the eurozone.
OTHER NEWS
Support from the Central Bank of Israel has pushed the Israeli Shekel up to being the top performing currency in November. This has been driven by billions in dollar purchases by the central bank since the outbreak of the war with Hamas.
Turkey’s Central Bank surprised markets by raising interest rates by 500bp to set their benchmark rate at 40%.
PERFORMANCES AGAINST US DOLLAR
Information as of 2023 November 27th 10.00 UAE time.
THE WEEK AHEAD
Monday, Nov 27th
US New Home Sales
US Dallas FED Manufacturing Index
Tuesday, Nov 28th
Australia Retail Sales
US S&P/Case-Shiller Home Price
Wednesday, Nov 29th
EU Economic Sentiment
Germany Inflation Rate
US GDP Growth Rate Q3
US GDP Price Index Q3
US Retail/Wholesale Inventories
Thursday, Nov 30th
Japan Industrial Production
Japan Retail Sales
Australia Building Permits
China NBS Manufacturing PMI
EU Inflation Rate
EU Unemployment Rate
India GDP Growth Rate Q3
Canada GDP Growth Rate Q3
US PCE Price Index
US Personal Income/Spending
Friday, Dec 1st
China Caixin Manufacturing PMI
EU HCOB Manufacturing PMI
UK S&P Global/CIPS Manufacturing PMI
Canada Unemployment Rate
US ISM Manufacturing PMI
