FX Weekly Report, 5th, December 2023
PERSPECTIVE
The unshakeable labour market. As we head into the first week of December, markets have their eyes on Friday’s US Non-Farms Payroll report. There is a lot of doom and gloom surrounding the global economy with consumers being squeezed by elevated price pressures, geopolitical woes and worsening economic activity. One subject central banks have continued to reference is the need to see softening in labour markets before interest rates can be cut. While we have seen some mild loosening in labour markets, they can only be described as ‘less tight’ and certainly not ‘loose’. Employment figures out of the UK, Europe and Japan in recent weeks show elevated interest rates have done little to move unemployment levels from near all-time lows. A leading explanation for the non-standard relationship between employment and the leading indicators is continued labour hoarding. Employers are still worried that if they let people go, they will not be able to get them back when and if they need them again as we saw after covid lockdowns. Strong pressure of demand arising from high deficit spending by the US federal government and the fact that Covid-era savings are still being spent by consumers is also a factor. As we move towards 2024, will we see labour markets remain resilient, or will they begin following the trend set by weakening leading indicators?
US DOLLAR
In the past week, we saw the US Dollar index appreciate by 0.5% against a trade weighted basket of its peers. The DXY is now trading flat year to date after another hugely volatile year.
From a data point of view, the last week showed the US economy is still in a strong position. GDP growth from Q2 was revised up to a whopping 5.2% and we are continuing to see house prices rise on an annual basis. There are further signs of a slowdown, however, in the form of a slight softening in the labour market as well as a contraction in manufacturing.
Continuing Jobless Claims have now jumped up by over 15% since early September and are at their highest levels since early 2022. The ISM Manufacturing PMI showed a 16th consecutive month of contraction, coming in below expectations at 46.7.
The major data release from last week was the FED’s preferred measure for inflation, the PCE Price Index. October’s figure showed prices remained flat in October and a year on year drop to 3% from 3.4% the previous month. Prices are now pushing back towards the FED’s target of 2% in welcome news for markets.
This was the main the main driver behind the recent sell-off in the dollar with markets now pricing in rate cuts from the FED as early as May 2024. In a speech on Friday FED Chair Powell warned that it is “premature” to be discussing rate cuts and the central bank’s position has not changed. The Fed’s next interest rate decision meeting is in two weeks and markets will be keeping watch on the swathe of data releases in between. This coming Friday we have a crucial Non Farm Payrolls report for November. If more loosening is seen in the labour market, we could be set for another sell-off in the Dollar.
One major cloud surrounding the US economy that also must be considered is the issue of rising government debt. Fitch has downgraded the US sovereign credit rating, and the risk of a government shutdown remains. Government budget deficits now sit at 6% of US GDP and the government’s overall debt is set to rise to 115% of GDP, surpassing its peak after World War 2. These soaring debt levels must be addressed at some point in the near future, and the US consumer will be the most affected. This issue is not being ignored by market participants, as rebalancing the books is going to come at the cost of economic activity.
ASIA-PACIFIC
In China we saw the Renminbi hold steady a touch below 7.15 vs USD last week. Data releases were limited last week, with manufacturing PMIs showing a slight expansion for November, albeit from previously very depressed levels. News out of China is doing little to convince markets the economy is on its way back to full recovery. Estimates show that foreign direct investment to China is down up to 90% year on year as investors continue to pull their assets out from the world’s second largest economy and the rating agency Moody’s has cut its credit outlook on the country to negative. There are well publicised issues within the real estate and the linked shadow banking sector, the extent of which are not fully known. In the past week two executives of troubled shadow bank ‘Zhongzhi’ have gone missing days after the Chinese authorities announced they were opening an investigation into the conglomerate. Looking to the week ahead, market participants will want to see a reversal in the deep contraction seen in import/export levels. On Saturday, we also have a key inflation print, with further deflation predicted.
Speculation continues that Beijing will announce enlarged economic stimulus to augment the modest measures already passed. There are reports that local governments are lobbying the central government for this, and that the country will set an ambitious growth target for 2024 to signal its intent and boost confidence.
The Yen appreciated by another 1% last week against the US Dollar in welcome news for Yen holders. Data releases from Japan were mixed last week with retail sales showing a monthly drop of 1.6% but we saw a 1% rise in industrial production as well as a drop in unemployment to 2.5%. Further news out of Japan last week was from regulators, raising pressure on regional banks to ensure the resilience of their balance sheets as the country prepares for its first interest rate rise in over a decade. There are concerns that an SVB-style collapse could occur if banks do not hedge their interest rate exposures. Overall, however, a positive week for the Japanese economy and its currency.
After a tough 2023, the Australian Dollar traded flat against its American counterpart last week hovering around the 0.66 mark. During the week we saw some positive housing data with a 7.5% increase in building permits in October. The consumer continues to be squeezed, however, due to elevated interest rate levels with retail sales showing yet another contraction. This week we have the RBA interest rate decision where rates are expected to remain at 4.35%. Markets will be waiting for further guidance from the new governor, Michelle Bullock, on current conditions and any hints of potential cuts moving into 2024.
SOUTH ASIA
INR remained steady slightly weaker than 83.3 vs USD last week as the Indian economy continues to perform well despite a weak global picture. Thursday’s bumper GDP growth rate data of 7.6% shows India continues to profit from China’s woes as it continues to gain ground as a trading partner for developed and emerging economies.
PKR ended the week trading flat against USD a touch below 285. A hot inflation print on Friday further increased the chances of another rate increase from the central bank. Markets await the dispersal of the latest tranche of Pakistan’s IMF loan over the coming weeks in the hope the economy can be stabilised and pressure lifted from consumers.
MIDDLE EAST AND AFRICA
The Nigerian Naira remains highly volatile; large daily moves in official rates are being observed, while the parallel rate continues to weaken back to levels last seen in early November, just after the CBN intervention. This suggests dollar shortages are becoming a problem for traders on the ground once more and has led to calls for more government intervention in the FX market to clear the backlog of requests stuck with the central bank. Next week we have the CBN interest rate decision meeting where rates are expected to rise to 21%. Will this provide support to the struggling Naira? Time will tell.
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 battling high inflation levels and weakening economic activity and made the unexpected announcement on Tuesday that it will increase rates by a full 2%, to 12.5%, the largest hike since 2011. It remains to be seen if this will succeed in easing pressure on the currency.
After the Reserve Bank of South Africa opted to keep rates steady at 8.25% last week, we have seen a mild selloff in the Rand and the currency ended the week trading 0.75% weaker against USD at 18.8. Tuesday’s GDP growth data will give a good idea of overall market conditions moving into the holiday season.
EUROPE
GBP remains the second-best performing currency in the G10, behind the Swiss Franc, in 2023. Last week, Sterling traded flat against the Dollar finishing the week trading a little below 1.27. This represents a 4.5% appreciation in GBP against USD in 2023. There was no major market moving data last week from the UK. A stabilisation in house prices and expansion in the services sector, however, came as a welcome surprise and confounded expectations. Moving into the week ahead data releases are sparse once again. The major market movers will be Governor Bailey’s speech on Wednesday and the labour market data releases out of the US.
The Euro dropped back below 1.09 against the Dollar last week and is trading weaker than 1.16 against GBP for the first time since September. Large data misses in services and manufacturing teamed with a larger than expected drop in inflation for November have pushed the common currency back down. Markets have now completely priced out the possibility of further hikes from the ECB and are now moving forward dates of potential cuts in 2024 to the March meeting. In the week ahead we have prints for retail sales and Q3 GDP growth, which will be the main market movers ahead of the interest rate decision meeting on 14th December.
OTHER NEWS
The IMF has said Egypt’s battle against record consumer price growth takes precedence over Egyptian Pound reform. The news eases pressure on the Central Bank to immediately enact a much-anticipated currency devaluation. The Pound is currently trading some 40% weaker on the black market compared to official rates.
PERFORMANCES AGAINST US DOLLAR
Information as of 5th December 2023 10.00 UAE time.
THE WEEK AHEAD
Monday, Dec 4th
Germany's Balance of Trade
US New Factory Orders
Tuesday, Dec 5th
China Caixin Services PMI
Australia RBA Interest Rate Decision
EU HCOB Services PMI
EU Consumer Inflation Expectations
EU PPI
US ISM Services PMI
US JOLTs Job Openings
Wednesday, Dec 6th
Australia GDP Growth Rate Q3
EU Retail Sales
US ADP Employment Change
Canada BoC Interest Rate Decision
Thursday, Dec 7th
China Balance of Trade
EU GDP Growth Rate Q3
US Challenger Job Cuts
Friday, Dec 8th
Japan Q3 GDP Growth Rate
Germany Inflation Rate
US Non Farm Payrolls
US Unemployment Rate
US Michigan Consumer Sentiment
