Currency Outlook | October 2023
The below key drivers are likely to impact investor risk sentiment and FX markets in October:
EUR Euro
October could see the euro dip below US$1.05. The weight of German economic weakness and a 3rd month of missed data targets is adding to inflation pressure and prompted the ECB to unexpectedly hike 25bps.
The EURUSD pair’s recent descent continued in September as investors began to shun the euro as economic data is painting a picture of an economy beginning to stall. The pair started the month around US$1.09 however it dropped below 1.05 by month’s end.
The European bloc’s largest economy, Germany, has seen its powerful manufacturing sector hugely impacted by rising costs and a lack of demand from China. September’s German Flash Manufacturing PMI printed under 40, miles away from the 50 level that would show sector growth. Germany also saw economic data such as Factory Orders, Industrial Production and Retail Sales all miss target, indicating that growth could turn negative again in Q3.
The European Central Bank (ECB) surprised markets by raising interest rates to 4.5% on Sept 14th but it seems this will be the last hike before it starts cutting rates early next year, sooner than previously expected. Looking ahead, Oct 26th’s interest rate decision should see the ECB hold rates but commentary on future moves will be the main area of interest. Should ECB Chief, Christine Lagarde cut a downbeat tone then EURUSD could head towards parity. Before this decision, she will have the latest PMI readings from across the Eurozone to study, which are due on Oct 23rd.
GBP Sterling
October could be another disappointing month for the pound. Local data indicates a finally slowing economy which could lead the BoE to hold interest rates again but US economy strength could stem GPB growth.
September was a miserable month for the pound. A fall in GBPUSD, which began in mid-July, gathered pace as summer ended. Starting September trading around US$1.27, the GBPUSD ended below US$1.22, its lowest level since March this year.
September 20th saw the latest Consumer Price Index figures miss the target, dropping to 6.7% year-on-year from the previous month’s reading of 6.8%. Most analysts had expected it to nudge higher to 7% and it was this easing of price pressures which likely was the reason that the Bank of England (BoE) unexpectedly decided to hold interest rates at 5.25% instead of the predicted 25bp hike. Monthly GDP, Retail Sales and Services PMI data showed an economy that was finally starting to grind to a halt after many months of outperformance.
The BoE is expected to hold rates at current levels until (potentially) beginning cuts in Q1 2024. This gloomier outlook combined with ongoing USD strength means that a move to US$1.20 could be on the cards.
The US dollar is continuing to benefit from the ongoing resilience of the US economy as well as economic concerns over China and the Eurozone seeing its safety sought. Should the deterioration of the numbers continue, further sterling losses against the USD are likely. However, given the economic concerns in the Eurozone GBPEUR could tread water throughout the month.
AUD Australian dollar
Without demand for Aussie exports and China’s economy to boost the AUD, the Australian dollar could see new lows in October.
Stubbornly sticky inflation and stability across key macroeconomic markers has forced analysts to adjust expectations for interest rates through the end of 2023 and 2024.
While the Reserve Bank of Australia (RBA) seems set on maintaining the status quo, a remarkably resilient US labour market and stubborn inflation pressures have prompted a shift in expectations for Federal Reserve policy.
Equities tumbled through September as investors sought safe havens, elevating demand for the USD. The AUD crashed through supports at US$0.6380 and quickly tested a break below US$0.63 through the first week of October marking fresh 2023 lows at US$0.6287.
We expect the AUD will face ongoing headwinds through October and the rest of 2023 as the risk-off narrative created by the rise in global rates and bond market selloff is exacerbated by concerns surrounding the outlook for the Chinese economy.
A sustained slowdown in China and Europe is expected to weigh on the global growth outlook, extending the downturn across key Australian industrial metals. With demand for key Australian exports likely muted, we anticipate the AUD will continue to test new depths and possibly extend a break below the October 2022 low of US$0.62
NZD New Zealand dollar
October could be another disappointing month for the NZD. Despite a stronger-than-expected Q2, low demand for exports could see the Kiwi dollar test new lows.
While the Reserve Bank of New Zealand (RBNZ) seems set on maintaining the status quo, a remarkably resilient US labour market and stubborn inflation pressures have prompted a shift in expectations for Federal Reserve policy.
Like Australia, equities tumbled through September as investors sought safety, elevating demand for the USD. The New Zealand dollar crashed through supports at US$0.5920 and quickly tested a break below US$0.59 through the first week of October marking fresh 2023 lows at US$0.5880.
With the RBNZ cash rate better aligned with peak global rate expectations, the NZD found some support among those seeking a carry trade option, thanks to a stronger-than-expected rebound in domestic activity through Q2. Experts expect the NZD could face difficulties through October and the rest of 2023 because the rise in global rates and bond market selloff is exacerbated by concerns surrounding the Chinese economy.
A sustained slowdown in China and Europe is expected to weigh on the global growth outlook, extending the downturn across key NZ exports. With demand for key exports likely muted, we anticipate the NZD will continue to test new depths and possibly extend a break below the lows seen in September.
USD United States dollar
More jobs in the US led to a stronger US dollar, beating other major currencies. But the Federal Reserve hints at uncertainty due to tighter financial conditions, possibly delaying rate increases.
Employment data was still a big surprise in the US with more hirings than expected, so the US dollar has considerably increased. The US dollar beat all G10 currencies, such as the British pound, Japanese yen, euro and Australian dollar, by 3.4%, 2.5%, 2.4%, and 1.5%, respectively. The only currency outperforming the US dollar was the New Zealand dollar, beating the USD by 0.4%.
However, Fed officials are giving us a hint that this US dollar strength may be faltering. Mary Daly, President of the Federal Reserve of San Francisco, said that financial conditions have tightened considerably, so we shouldn’t assume that we’re now in a higher-rate environment, despite US treasury bond rates still being high and increasing.
The Federal Reserve (Fed) will probably have to remain patient, inferring a further pause of interest rates. Statements from the Fed say corporate debt refinancing could significantly drag down the economy and the move in Treasury yields was certainly going to feed into decisions about whether another rate rise is necessary this year.
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Market participants are betting on quieter Fed participation over the following months. They are now betting that the Fed won’t move rates this year and that the Fed won’t cut rates too often in 2024 – roughly three quarter-point reductions from the current levels of 5.25-5.50%.
JPY Japanese dollar
The yen looks to hold steady in October. The Bank of Japan continues its ultra-loose monetary policy but is watching markets with a “high sense of urgency”. Experts expect no major changes for the October 31st meeting.
The Japanese Yen lost out against the US greenback for September. USDJPY opened the month around 145.50 and closed at 149.37 while reaching a high of 149.71 towards the end of the month. The low for the month was down at 144.45 on the first trading day of September.
The start of October has continued to boost USDJPY, with the pair attempting to exceed the 150 level by hitting an 11-month high, around 149.90. The Bank of Japan (BoJ) is continuing its ultra-loose monetary policy as it announced an unscheduled bond-buying exercise to curb the upward spiral in Japanese government bond yields.
Both Japan’s Minister of Finance, Shunichi Suzuki and the Chief Cabinet Secretary, Hirokazu Matsuno said they are watching FX moves and markets very closely with “a high sense of urgency”. The psychological level of 150 for USDJPY may struggle to be reached with fears of FX intervention as many analysts believe if it touches the mark there will be intervention to prevent the Yen’s devaluing continuing.
The Bank of Japan is due to release its next interest rate decision and monetary policy statement on the 31st of October. Markets are forecasting no change again from the central bank.
CAD Canadian dollar
September was a strong month for the CAD, likely driven by local inflation and a strong labour market. Experts predict the Bank of Canada to hike rates by 25 basis points by March 2024.
The Canadian dollar displayed a strong performance throughout September and the first week of October, compared with most G10 currencies. CAD outperformed the British pound, Japanese yen, and euro, surpassing them by 2.4%, 1.4%, and 1.3%, respectively. Nevertheless, the Canadian dollar experienced a decline against the NZD and US dollar, with decreases of 1.52% and 1.13%, respectively.
The robust performance of the Canadian dollar can likely be attributed to Canadian inflation, which served as an early indicator of the potential for prolonged higher interest rates in Canadian and American bonds. This, in turn, led to the strengthening of the CAD and USD against other G10 currencies.
Canada’s labour market exceeded expectations for the third consecutive month, accelerating wage growth. This development did little to deter speculation about another interest rate hike due to persistent inflation. Notably, one-third of the Canadian workforce is unionized, which is a significantly higher proportion than the one-tenth in the US. This makes collective bargaining a more influential factor in Canada.
Market participants in Canada increased their expectations of further tightening measures by the Bank of Canada of another 25-basis point hike expected by March 2024. Indeed, the patience of the Bank of Canada is being tested.
SGD Singapore dollar
September was unsettled for the SGD. Early-month losses were partly erased as US yields moved lower by month’s end. Easing local inflation and slowing economic growth has experts predicting no monetary policy change at the October MAS meeting.
September was slightly better than August for the Singapore dollar, with SGD only dropping by 1% against the USD, compared to a 1.6% loss in the previous month. However, the SGD did reach a 10-month low on 27th Sep at US$0.7278.
The weakness in the SGD continued in September, off the back of strengthening USD after a hawkish pause from the Federal Reserve. Some of the loss was unwound though towards the end of the month as the US treasury yields moved lower, alleviating some pressure on the SGD.
On the data front, the core inflation in Singapore edged lower again to 3.4% year-on-year. Coming into October, the monetary policy from the Monetary Authority of Singapore (MAS) will be the focus. The market expectation is that MAS will make no change to its FX policy settings October meeting due to easing inflation and slowing economic growth.
HKD Hong Kong dollar
The HKD rallied in September before downward trending by month’s end. The HKMA held rates and is likely to do the same in October, keeping the HKD fairly stable if global markets hold steady.
The Hong Kong dollar was among one of the few currencies that rose against the USD in September. The USDHKD pair moved lower from HKD$7.8418 to HKD$7.8306.
The Hong Kong Monetary Authority (HKMA) kept its base rate unchanged at 5.75% on 21st September, in line with the pause from the Federal Reserve. The strength in the HKD in the beginning of September was possibly due to the rally in its local stock market. It then received another boost mid-month after China’s regulators gave a warning to traders on yuan speculation and said actions would be taken to correct one-sided moves in the market.
In the meantime, The Hong Kong Interbank Offered Rate (HIBOR) kept an upward momentum in September until it headed downward closer to the month’s end, which also helped the local dollar.
In October, the HKD is most likely to remain within its recent trading range, should the global rates markets start to consolidate.
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