FX Market Briefing - 'Shut the Door' - November 13th

Last Week

U.S. Dollar : Chairman Powell's recent remarks (omitting the explicit take) and a weak treasury auction have strengthened the dollar, shutting the door on doves, contrasting with earlier hawkish interpretations from the FOMC. His focus on GDP growth, inflation, and the labor market signals that monetary policy will be guided by economic data. This aligns with recent data showing steady GDP and moderate payroll increases. However, Powell is cautious about upside inflation surprises, keeping the possibility of tightening in focus. Consumer sentiment surveys drop with rising inflation expectations, warranting caution even as equities recover.

Canadian Dollar : The Loonie remains weak against the USD despite the Bank of Canada's hawkish outlook, with U.S.-Canada 2Y yields at 45bps. This stance aims to counteract market expectations of rate cuts and highlights concerns about core inflation. In Australia, the RBA's rate hike to 4.35% indicates a data-driven approach to future policy decisions, with labor and consumption growth as key factors. Broader commodity FX faces challenges with weak China data indicating a subdued demand outlook, amid an upcoming key OPEC+ meeting.

Euro and British Pound : The Bank of England suggests a prolonged restrictive policy, though rate cuts in the next year are possible. Chief Economist Pill's comments suggest a possible alignment with market expectations of easing from mid-2024. The Eurozone is monitoring Italy's fiscal policy and its impact on the Euro. The U.S. Treasury is observing Germany's fiscal surplus strategy amidst economic decline.

Japanese Yen : USD/JPY has crossed the 151 threshold again. Despite the Bank of Japan's policy adjustments and Governor Ueda's steady stance, the Yen remains weak. Market skepticism about BoJ's credibility persists, with potential policy changes expected if wage growth meets forecasts by end-2023.

The Week Ahead

U.S. Dollar: USD faces potential downside risks in next week, primarily influenced by the Oct. CPI data. A forecast of flat headline and 0.2% core inflation, below market consensus, could exert downward pressure on US yields and the Dollar. Soft inflation numbers can generally be perceived as both USD negative and risk positive. Close monitor on additional data such as PPI, Retail Sales, and various Fed speeches for will be key further directional cues. Fed members are monitoring for CPI head fakes. Biden and Xi will meet at the APEC meeting, first meeting in a while could set tone fortrade relationships which have soured.

Canadian Dollar: CAD may retest 1.39 ceiling against the USD, with underlying fundamentals and a significant US/CA yield gap influencing its trajectory. Canadian data, including Wholesale, Manufacturing Sales, and Housing Starts, will be closely watched after hawkish BoC summary. AUD exhibits upside potential, especially if US inflation softens, potentially boosting global equities and commodity fx.

Euro and British Pound: European focus will be on revised Q3 GDP data from the Eurozone and CPI data from the UK. Euro has shown resilience lately, but Sterling has been trading softly. UK's CPI data, expected to show a significant reduction in inflation, might influence the GBP's trajectory, with potential downside risks if the data leads to a dovish policy outlook.

Japanese Yen: JPY still failing to benefit from a declining yield spread differential with the USD. Despite a strong historical correlation with spreads, carry trade attractiveness and perceptions of easy BoJ policy are countering potential gains. Focus will be on Japan's Q3 GDP, although is likely limited. A recovery in the JPY might require equity market volatility or a macro decline in USD, which in turn could trigger carry unwinds. A soft US CPI could create conditions for a longer-term JPY recovery.

FX Risk Management Insight: As the Canadian Dollar struggles against the USD, largely due to a 40-45bps spread in the U.S./CA 2-year yield, management teams should take note. Despite the Bank of Canada's hawkish stance against rate cuts in 2024, it's important for companies to either establish or reassess their FX strategies. This involves a recalibration of hedge ratios to account for potential USD decline or its continuation. An effective pricing strategy can then be implemented, using market-adjusted rates, possibly guided by a determined moving average. This approach ensures competitive pricing, an important advantage in a volatile and higher cost of capital business environment. Maintaining strong supplier relationships and managing input costs through methodical FX rate negotiations and incorporating a volatility buffer can significantly enhance supply chain resilience. Adapting with a flexible yet disciplined FX management approach will be key to managing challenges and opportunities presented by the Canadian dollar's performance.

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