Weekly Market Update 11 November – Dollar nosedived after softer than expected inflation data led investors to dump the currency
Weekly Market Update 11 November – Dollar nosedived after softer than expected inflation data led investors to dump the currency
1. The Greenback took a nosedive on Thursday to close below 106 by Friday after a slew of lower than expected inflation data led investors to dump the currency, firmly reversing its rapid ascent since the beginning of this year. On Thursday, m/m CPI for October at 0.4% was lower than market expectations of 0.6%, consistent with a declining trend since reaching its highest in over a decade in July at 1.3%. Similarly, CPI y/y extended its decline since its peak of 9.1% in July, coming in at 7.7% in October, which was lower than market expectations of 7.9%. The market also overestimated Core CPI m/m which was 0.3% for October, lower than the expected 0.5%. Crucially, Core CPI has a stronger influence on FOMC rate decisions because it excludes the volatile prices of food and energy costs. All indicators reflect tapering inflationary pressure, suggesting that the Fed’s contractionary monetary policy is taking effect. This aligns with recent unemployment data indicating higher than expected claims for October at 225k. The Wilshire 5000 Index which captures 100% of the US investable market also saw a sharp increase from 37,300 on Thursday to above 39,000 by the week’s end, suggesting that there was the decisive shift to a risk-on market sentiment on the same day which further exacerbated the safe haven currency’s decline. Despite market anticipation for another 50bps rate hike in December’s FOMC meeting, dovish statements from the Fed last week coupled with the recent data foreshadows a slower pace of rate hikes in 2023 which could weigh down on the Dollar.
2. Euro pushed past parity to trade above 1.03 by Friday, coinciding with the dip in the Dollar. Strong GDP growth in the first quarter of the year is expected to lift overall real GDP growth in 2022 to 3.3%. However, performance has gradually worsened over the year and GDP contraction in October of -0.6% was worse than market expectations of -0.4%, representing the third month in a row of negative growth. Economic activity is expected to continue along a contractionary trend with a technical recession approaching in the winter. Annual growth is forecasted to shrink to 0.3% in 2023, while the deficit is set to increase to 3.6% of GDP. Despite the deteriorating economic outlook, ECB board members have rigidly maintained a hawkish stance to beat back inflation which is expected to soar to 9.3% this year and remain stubbornly above their 2% target at 7% in 2023. Forecasters thus anticipate that the ECB’s key main refinancing operations (MRO) interest rate will increase steadily from 2.0% in the fourth quarter of 2022 to 2.6% in the first quarter of 2023, before stabilising at an average of 2.7% until 2024. In addition, the average gas storage filling of 92% among EU member states has exceeded its target of 80%, suggesting that the record energy trade deficit that caused the Euro to plunge this year will not weigh down as heavily in the near term with sufficient reserves to last the winter months. The Euro is thus expected to continue appreciating against the Dollar from 0.98 in the fourth quarter of 2022 to 1.05 in 2024. Closely mirroring the Euro, the Pound soared above 1.18 by Friday after a bullish week spurred by softer than expected US inflation data, recovering from a historic low against the Dollar of 1.07 in September. However, the appreciation of the Pound is expected to be weighed down by poor economic performance. Preliminary q/q GDP growth of -0.2% for the third quarter this year was the fifth consecutive quarter of declining growth rates since August 2021. The economic fallout of the BoE’s rate hikes have already prompted dovish arguments from several policy makers who fear a prolonged recession.
3. Commodity currencies made sharp gains on Thursday against the Dollar in line with other currencies globally after the rapid decline of the Greenback on the same day. By the close of the week, Aussie peaked at 0.67, Loonie at 0.75, and Kiwi at 0.61. However, broader macro headwinds indicate that recent gains in commodity currencies could be short-lived. While recent floods in Australia have diminished agricultural output and pushed food prices up, the RBA predicts that headline inflation will peak at 8% at the end of 2022 before declining gradually to the top of its target band by the end of 2024. Tapering inflationary pressure reduces the impetus for further rate hikes. Overall growth in Australia’s main trading partners is also forecasted to slow below 3.5% in 2023, well below the pre-pandemic decade average of 4.5% amidst an impending global recession and tightening covid measures in China. Softer rate hikes and a dwindling trade surplus will weigh down the Aussie in the new year even as the Dollar continues to decline. Meanwhile, Investors are betting that the BOC will announce another 25-50 bps rate hike on December 7, before reversing course in 2023. The latest inflation data for Canada indicates that the BOC’s hawkish policies have succeeded in halting runaway inflation, with price increases slowing down from a 39 year peak of 8.1% back in June to 6.9% in September.
4. Brent Crude Oil prices pared recent losses to peak at $96 per barrel by the end of the week following the dip in the Dollar. The devalued greenback boosted demand for the Dollar-denominated commodity which became more affordable for buyers purchasing in foreign currencies. The relaxed Covid-19 curbs announced by China on Friday also raised hopes for economic recovery and increased demand in the largest global consumer of oil, compounding the spike in oil prices on the same day. In the month ahead, investors should anticipate another OPEC+ meeting on December 4 which could see further production cuts on top of those announced last month amidst conservative statements from Saudi Arabia’s energy minister. Meanwhile, Gold pared recent losses as prices soared over the past two weeks to a 3 month high of over $1770 per ounce on Friday on the back of a declining Dollar. Softer than expected US inflation data and market anticipations of slower pace of rate hikes amid the macro headwinds bolstered demand for the bullion and treasury bonds while US treasury yields plummeted across the board on Thursday.
