Weekly Market Update 25 November – Dollar pared recent gains after recent FOMC statements confirmed expectations of softer rate hikes in 2023

Weekly Market Update 25 November – Dollar pared recent gains after recent FOMC statements confirmed expectations of softer rate hikes in 2023, boosting other currency pairs

1. Dollar pared recent gains to dip to below 105.7, after a slew of gloomy economic data and dovish FOMC statements reversed last week’s bullish trend to the downside. Flash services PMI extended its 5th month of contraction at 46.1, performing worse than market expectations of 48.0. Similarly, flash manufacturing PMI performed poorly at 47.6, dipping into a contractionary zone for the first time since 2020 and worse than market expectations of 50.0. Unemployment claims of 240K exceeded market expectations of 225K while new home sales extended its declining trend at 632K in October. Worsening economic conditions could weigh down the Dollar as the threat of financial instability induces caution and softens the Fed’s impetus for further aggressive rate hikes. Indeed recent FOMC minutes have shown that while the Fed is willing to endure a slowing economy for more stable inflation, FOMC members have expressed concern on the impact that it is having on financial stability, and will likely slow the pace of rate hikes to a 50 bps increase in December as opposed to a previous increase of 75 bps. However, the slowdown in rate hikes to 50 bps came as no surprise and had been already expected by investors. The ensuing decline in price may be misaligned with market fundamentals and the steep dip into oversold conditions could see the Greenback rebound in the coming week in the form of a price correction. Markets expect more albeit softer rate hikes to come in 2023 and eventually peak at around 5%. While a 1.5% gain in the S&P 500 this week to its highest level since September signals a shift towards a risk-on attitude that could further weigh down the safe haven currency, growth in risk appetite could be moderated in the long term given the unstable Covid situation in China. Investors should closely monitor the core PCE price index due for release on Thursday, which will be a significant factor in determining how soon the Fed eventually decides to halt rate hikes altogether.

2. The Euro extended its rally after closing above 1.04 against the Dollar on Friday, driven by upbeat economic data that improved hopes of a recovery. Flash manufacturing and services PMI for Germany were contractionary, but better than the previous month’s at 46.7 and 46.4 respectively, beating market expectations. Although French flash services PMI of 49.4 performed marginally lower than expectations of 50.6, this was outweighed by flash manufacturing PMI of 49.1 which was an improvement from last month and higher than expectations of 46.9. France and Germany are Europe’s largest economies, and their economic performance has a significant impact on the Euro as a whole. Furthermore, preliminary estimates of the Euro Area consumer confidence indicator rose by 3.6 points to -23.9 in November of 2022 which beat market expectations of -26, while consumer sentiment in the European Union as a whole rose by 2.8 to -25.8. Although recent data indicates that the EU still ran a current account deficit of €8 billion deficit in September, this was significantly narrower than the deficit of €27 billion in previous month. The EU’s stockpile of oil since the peak of its energy crisis in the summer has far exceeded the 80% capacity target, while more policies such as joint gas purchases and quicker permit processes for renewables to wean itself from the chokehold of Russian energy supplies are on the way. Import driven energy costs are set to be formally capped at €275/MWh at an EU meeting called on December 13, which could alleviate the slump in consumption demand. Although economic performance in the EU is still worse compared to previous years, the recent data provides a renewed sense of optimism even as the ECB gears for another rate hike in December, which could propel the Euro’s ascent.

3. Similarly, Pound rallied to its highest point since August above 1.21 on the back of a declining Dollar and better than expected economic indicators. Flash services and manufacturing PMI both performed better than expectations, at 48.8 and 46.2 respectively. While both figures are still within contractionary levels, they are a welcome improvement from months of decline, representing a potential turnaround alongside its European counterpart. The latest PMI figures confirm the prospect of rising investor confidence in the economic reforms of the post-Truss government that could extend Sterling’s rally against a bearish Dollar index which is set to decline further.

4. Commodity currencies made week on week gains to peak on Friday at 0.676, 0.750, and 0.627 for the Aussie, Loonie and Kiwi respectively, before paring their rally on shortly after news of an apartment fire in China’s Xinjiang province that led to an outbreak of protests across the country. Commodity currencies tend to underperform in a risk-off market sentiment, while fluctuations in the Aussie and Kiwi are especially prone to events in China; the largest export partner of the export dependent economies of Australia and New Zealand. With tight covid restrictions creating a slump in economic activity, demand from China for raw materials from Australia and New Zealand are expected to continue declining to the detriment of their trade balance, which could weigh down the Aussie and Kiwi further. This comes even amidst a 75 bps rate hike by the RBNZ on Wednesday which did little to bolster the Kiwi as the announcement was perfectly in line with long held expectations that had already been priced into the market. However, the 75 bps rate hike means that interest rates in New Zealand and Canada are now on par with the US at 3.75-4, leaving Australia at 2.85 which could see the Aussie being the biggest laggard in their overall bullish reversal against the Dollar since October.

5. Brent Crude oil price extended its decline to trade around $84 per barrel by the week’s end, its lowest level since January amidst tapering global demand. In addition to a stymied demand in Europe which has surpassed energy sufficiency targets, unstable conditions in China have caused demand to plummet further amidst a bearish backdrop. On Sunday, China saw a fifth straight daily record of 40,347 new Covid-19 infections which could prompt fresh new covid restrictions as the Communist Party remains steadfast to its Zero Covid stance. Over the weekend, widespread unrest and outbreaks of protests in the country over the strict covid rules implemented by the regime further contributed to the negative sentiment in the oil market. As the largest global consumer of oil, deteriorating economic and political conditions in China are set to continue weighing down the demand outlook for oil. Meanwhile, changes to the price of Gold largely remained flat over the week, which ended the week only marginally higher than at the start at around $1753 per ounce. The Bullion was given a helping hand in its small weekly gain on the back of a dovish tilt in the US that caused the Dollar’s retreat.