30 Oct FX outlook – USD, EUR, GBP, CAD, AUD, NZD

USD

Volatility remained prevalent last week, with tension in the Middle East playing out alongside a raft of major economic announcements and big tech earnings. The US dollar emerged as a net winner this week as we continue to see strong data prints from the US economy, supporting the Fed’s hawkish monetary policy approach. Meanwhile, weakness across equity markets produced a risk-off move that served to benefit havens such as the dollar and yen.

The US economy has remained resilient despite the Federal Reserve’s tightening policy, with improved consumer habits and healthy business activity helping to maintain expectations of a potential additional 2023 rate hike from the Fed. The services and manufacturing PMI reports gained momentum, with both now out of contraction territory. Meanwhile, the US economy grew at an impressive annualized figure of 4.9%. Well above expectations of 4.5%.

For the new week, the dollar will likely be guided by Wednesday’s interest rates decision from the Fed. While expectations signal a high chance of a rate pause this week, markets will be looking for any signs over whether a December hike is likely. Current pricing signals a 19% chance of a December hike, but the dollar will be sensitive to any actions or commentary that change that perception. This will be followed by a raft of other top-tier data reports which include the NFP, unemployment claims, and the ISM services PMI.

EUR

The euro performance was mixed against major currencies this week as investors weigh up the possible recessionary environment highlighted by recent data. On the downside, the euro lost ground against the likes of the US dollar, Australian dollar, and Japanese yen. However, the single currency did manage to gain around 1% over the Canadian dollar.

The single currency was first dealt a blow on Tuesday, with both services and manufacturing PMI surveys falling further into contraction territory. One particular area of concern came from Germany, with the services sector gauge moving sharply lower from 50.3 to 48.0. With German inflation sharply lower and the economy contracting, the pressure on the ECB to raise rates further has been significantly reduced. The ECB meeting did ultimately follow up that theme, with the committee pause rates after 10 consecutive hikes. Looking ahead, it looks likely that the tightening phase is over for now, with the decline in inflation and economic activity serving to highlight that their actions are taking an effect.

This week sees a focus on eurozone inflation, with Monday’s German and Spanish CPI reports providing the precursor to the key eurozone figure on Tuesday. Growth will similarly provide the basis for euro volatility, with the eurozone GDP figure expected to fall back down to 0% for Q3. Also keep an eye out for Friday’s eurozone unemployment rate, which has remained subdued despite the weak growth picture in recent months.

GBP

The pound experienced a choppy week just gone, with initial gains seen on Monday ultimately fading and giving way to a more indecisive second half of the week. While the pound found itself ending the week largely unchanged against the likes of the dollar, euro, and yen, the currency made particular headway against the likes of the Canadian dollar. That was more a case of CAD weakness, with GBP similarly losing ground against AUD.

Last week saw the pound driven lower in the wake of Tuesday’s job report and PMI release. In particular, the sharp uptick in UK claimants provided a warning sign for the jobs market. Nonetheless, the UK economic picture looks relatively stable, with unemployment ticking lower, and little deterioration in the PMI surveys. Contraction in the UK economy is likely a good thing from the BoE’s perspective, with inflation pressure continuing to blight the MPC.

Looking ahead, the Bank of England look set to dominate proceedings this week, with the MPC announcing their latest monetary policy decision on Thursday. Sandwiched between the FOMC meeting and US jobs report, there should be plenty of volatility for GBPUSD in particular. While expectations around the BoE meeting point towards another pause, the last meeting was on a knife edge with four of the nine members voting to hike. Could the lack of any downside in UK inflation push one of those members to change their mind? Expect plenty of volatility for the pound as people pour over the BoE comments and press conference for signs that we could see additional tightening.

CAD

The Canadian dollar dropped around 0.9% over the course of last week, closing out on Friday as the worst performing of the major currencies. Those losses were particularly evident against some of the major havens, with the US dollar and Japanese yen enjoying strong gains over the Loonie. The CAD weakness emerged on of a mix of falling oil prices and a relatively dovish shift at the Bank of Canada rate decision.

The concerns around a potential flare up in Middle East instability has been allayed thus far, with the Israeli ground assault being held off throughout recent weeks. That has brought volatility for energy markets, with last week’s decline in WTI helping drive CAD lower. Meanwhile, the Canadian economy has been feeling the impact of the BoC’s tight monetary policy with a notable slump in the October inflation release in Canada providing expectations of a less hawkish stance over future rates. Markets are now looking for the bank to cut interest rates next year, with falling inflation and a weakening economy expected to herald an environment that allows the BoC to loosen the reigns next year.

That focus on the economy will be key as we look ahead this week, with the latest GDP, manufacturing PMI, and jobs report data bringing a wide breadth of information to gauge the direction of travel. With the last five months of growth amounting to a mere 0.1%, there is clearly cause for concern for the Bank of Canada. The manufacturing PMI has also continued to deteriorate of late, with the September figure of 47.5 marking the sharpest contraction in three-years. The Canadian dollar looks at risk of further weakness if we see additional signs of economic distress.

AUD

A volatile week for the Australian dollar saw an impressive period of outperformance on Tuesday and Friday. That helped the AUD find itself as one of the top performers on a week, which is remarkable given the risk-off sentiment that has pushed the likes of the Nasdaq and S&P 500 into correction territory. Nonetheless, part of this comes in response to the fact that the Aussie dollar was hit hard leading into last week, with AUD fighting back to regain those losses.

Nonetheless, there is grounds for optimism here, with last week seeing plenty for the RBA to chew on. From a PMI perspective, the decline across both manufacturing and services does raise concerns around a potential slowdown in the economy. In particular, the sharp decline in the services figure saw a move from 51.8 to 47.6, dragging the sector back into contraction. However, the big driver of AUD upside came off the back of the surprise jump in inflation, with both annual (5.6% from 5.2%) and quarterly CPI (1.2% from 0.8%) bringing cause for concern at the RBA. The RBA now look likely to raise rates this year, with further tightening a distinct possibility at the 7 November meeting.

This week is relatively light on data, although Australian retail sales data announced on Monday do provide the basis for AUD trade. With markets increasingly considering the November meeting as being ‘live’, any particularly strong or weak consumer spending could shift sentiment over additional tightening. From a China perspective, the PMI surveys released over the course of the week provide the basis for potential AUD volatility. Any shift back below 50 would be particularly notable given the negative implications for Chinese growth.

NZD

The Kiwi dollar closed out the week on the back-foot following a choppy week that saw NZD both gain and fall out of favour. That choppiness has been a feature of the currency market as a whole, with sharp changes in risk sentiment on a daily basis. The Kiwi enjoyed a particularly good week against the CAD, but lost traction against its AUD neighbour.

Last week saw an almost entirely empty economic calendar, with the value of the NZD largely driven by existing sentiment and the strength or weakness of its counterpart currency. Recent improvements in the Chinese economic picture help alleviate some of the concerns that had dominated in weeks gone by. Concerns around the political uncertainty in New Zealand continue as we await the final results of an election that look to have replaced the Labour party with a right leaning coalition.

Looking ahead, any breakthrough on the political front should play a key role in sentiment, with the prospective coalition talking of a shift from a RBNZ dual mandate to one solely focused on inflation. From a New Zealand perspective, the latest jobs report will dominate proceedings on Tuesday, with forecasts signalling a potential jump in unemployment. Given the fact that last month saw a rise from 3.4% to 3.6%, the speculated rise to 3.9% would bring significant concern for the RBNZ. Suddenly the dual mandate could start becoming an important factor if the New Zealand unemployment rate starts to surge higher. Also keep an eye out for the latest headline and Caixin PMI surveys out of China this week as a driver of NZD sentiment.