Markets calm ahead of key data releases. The past week was the least volatile week of trading in FX markets for some time following a raft of central bank meetings in the weeks prior. As we head past the middle of the month, we will see several economic activity, labour and growth prints which will give markets a preliminary idea on the strength of economies ahead of the next central bank meetings in March and June. Predictions of rate cuts have largely been pushed back due to better-than-expected data on economic performance and/or persistent inflationary pressures. With a long break until the next monetary policy meetings, we can expect volatility to increase as more economic data is released in the coming weeks.
US DOLLAR
In the past week, we saw the US Dollar index appreciate by 0.15% to a touch over 104 after a relatively quiet week of trading in FX markets.
Data releases were fairly sparse last week with only a couple of notable prints. On Monday, the ISM Services PMI showed strong expansion at 53.4 vs an expected 51.7. Then on Thursday we saw Initial Jobless Claims dip back down to 218k in a sign the labour market remains extremely tight.
The US Dollar is now more than 3.5% stronger than its December low of 100.6. Traders have now all but abandoned their bets of a rate cut in the FED’s next monetary policy meeting in March after a wave of strong growth and labour market data. Additionally, the major US stock market index, the S&P 500, has risen above the 5,000 mark for the first time in history.
From a fundamental point of view, it looks as though the FED is steering the economy to the much hoped for ‘soft landing scenario’. Growth remains strong and price pressures have eased significantly in the past 18 months.
It will not be until the latter part of this year that we will begin to gather a clearer perspective on the true impact of the rate rises of the past 2 years. It is generally accepted that the effect of an interest rate rise takes between 12-18 months to filter through to economic activity levels. More rumblings of difficulties in the regional banking sector and commercial real estate add an element of doubt to the potential ‘soft landing’ scenario for the US economy. The potential for Donald Trump to return to the White House only adds to this uncertainty.
ASIA-PACIFIC
In China we saw the Renminbi hold steady at 7.19 against USD largely thanks to PBoC exchange rate targeting. The major news last week was China’s inflation data on Thursday which showed a 0.8% decline in consumer prices year on year for January. This represents the largest annual decline in 15 years and creates a huge challenge for Chinese policymakers. Inflation has been the major topic for global markets in the past 2 years but the effects of deflation can be far more severe. A deflationary spiral may turn hard economic times into recessions and then depressions. Under conditions of deflation, the real burden of a debt becomes more expensive over time, leading people and businesses to avoid taking it on as they try to pay off the increasingly pricy debts they already owe. One obvious example China will not want to follow is neighbouring Japan, which has battled deflationary pressures since the mid 1990s.
The Yen declined by 0.7% against USD last week to end the week trading at 149.2 vs USD. Another 0.9% drop in household spending in December cast further doubt on the potential for a switch to positive interest rates in April by the BoJ. GDP growth figures for Q4 are forecast to show the economy expanded by 0.4%. Any downward surprise is likely to put huge pressure on the Yen as futures markets interest rate differentials will widen further. The Japanese economy is entering a crucial period ahead of the forecast rate rise in April.
The Australian Dollar steadied against its US counterpart last week. The Aussie is now down 4.35% year to date against USD and is trading below 0.652, having traded as high as 0.685 just 6 weeks ago. After a weak inflation print the week prior, the RBA opted to hold rates at 4.35% on Tuesday. The Board pointed to progress against goods inflation helping to lower price pressures, but services inflation has eased only slightly – contributing to risk of resurgence in price pressures. The Board also signalled that demand outpaces supply which adds to existing inflation concerns but acknowledged that the dynamic is approaching a more sustainable balance. The RBA, in short, is intent on keeping all options on the table, including another rate hike, to address threats to the 2-3% inflation target. Given the standing interest rate differential against USD and a softening economic outlook, it is hard to find a case for Aussie Dollar strength in the near future.
SOUTH ASIA
INR held steady a touch below 83 against USD last week. Services activity showed very strong expansion once again, beating expectations. The RBI, on Wednesday, held its benchmark rate at 6.5%. Market conditions are robust with strong dollar inflows and excellent economic data reducing the necessity for imminent rate cuts.
PKR ended the week trading flat against USD a touch below 280 as the country headed into a highly anticipated general election. Beating the odds, Imran Khan’s followers gained most seats, winning 101 of a possible 265 seats. In an election that was supposed to bring much needed stability to the nation, this surprise has left a power vacuum and more questions than answers. Khan himself is still in prison and his followers do not have a majority mandate to form a government by themselves and face additional complications from having run as independents. The military-backed party, run by Nawaz Sharif may yet form a coalition government with the Pakistan People’s Party. Amid widescale accusations of vote rigging from both domestic and international observers, any government formed has a massive job on their hands to win legitimacy and prevent social unrest. Recent violent attacks and the election result have shown that large sections of the public are resistant towards the current ruling elite and more instability could put a heavy toll on the struggling economy and its currency.
MIDDLE EAST AND AFRICA
The Nigerian dropped to a record intra-day low against the dollar on Friday, following a devaluation last week, its second in less than a year, despite the central bank saying liquidity was improving. Central bank governor Olayemi Cardoso said on Friday that over $1 billion had come into the economy in the last few days to buy Nigerian Treasury bills. He told lawmakers on Friday that the measures taken by the bank to improve dollar supply have tamed currency volatility. But he added that forex demand had to be moderated for these measures to be sustainable. The central bank this week hiked open market rates to 19% from under 12% as inflation climbed to a nearly three-decade high. The current policies have been designed to bring much needed dollar flows into the economy; the question now moves to how sustainable the current path is - especially if we start to see shocks in major world economies.
The Kenyan Shilling has posted its second consecutive weekly gain against the dollar, appreciating by 0.9% to end the week trading at 159. This represents the first Shilling appreciation that has been sustained for more than a few days since Q2 of 2021. The confirmation that the government would not default on its loans and a surprise 50bp hike from the CBK helped support the Shilling. It is also reported than the government is planning to sell US Dollar Debt to refinance a $2bn bond payment due later in the year that had threated to push the economy to near breaking point. It seems a near term crisis has been largely averted and Kenya should be able to access further debt if required; the focus will now turn on its ability to boost economic activity in the short to medium term.
South African Rand ended the week trading 0.5% weaker against USD at 18.98. Weaker than expected manufacturing data caused a sell off in the Rand last week. Rand holders will be hoping for strong mining and retail sales data this week to help support the weakening currency.
EUROPE
GBP ended the week trading flat at 126.2 against the US Dollar. A strong services PMI helped support sterling against a strong dollar. The news that house prices rose by 1.3% in January was also a positive for the currency as bets of rate cuts later in the year were reduced. The week ahead we will see release of growth and employment data which will be crucial to the near term path of the pound.
The Euro ended the week trading at 1.078 against the dollar in a quiet week of trading for the common currency. The only data releases of note were bearish for the Euro with services and construction activity in contraction. Producer price inflation plummeted to -10.6% marking the largest decline in three months. Retail sales also posted a 15th consecutive monthly decline as the Euro economy looks set to enter recessionary territory in 2024. Comments from ECB members were largely hawkish throughout the week but a clear weakening in economic data is causing interest rate differentials to widen in futures markets. The release of Q4 GDP growth data on Wednesday could be vital for the direction of the Euro this week if it is revised upwards or downwards from the preliminary estimate.
OTHER NEWS
The Russian economy grew at 3.6% in 2023 according to the IMF, an extraordinary achievement given tough international sanctions. It is largely attributable to central bank measures to protect the monetary system, finding non-Western buyers for its commodity exports, high oil prices and the stimulus effect of defense spending, which now accounts for 40% of government budgets (a level last seen in late Soviet times).
Zimbabwe is considering backing its currency with Gold to end exchange rate instability. This comes come off the back of record central bank gold purchasing following the Russian invasion of Ukraine.
Thailand's central bank left its key interest rate unchanged for a second straight meeting on Wednesday, as expected, resisting government pressure to reduce borrowing costs to revive faltering growth.
PERFORMANCES AGAINST US DOLLAR
Information as of 12th February 2024 10.00 UAE time.
