In one month, the Dollar Index (which represents the US dollar’s fluctuation against the currencies of the United States’ principal trading partners) plunged by a remarkable 4.19%. The main explanation for this is that many market operators foresee a slowdown in the pace of US rate rises now that inflation has peaked. This is not yet a certainty. We should have better visibility on the trajectory of US monetary policy after the Federal Reserve meets on 14 December (consensus: 75 basis-point increase in the policy rate). In the meantime, the euro is displaying fairly remarkable resilience against several currencies. But the battle against the US dollar is not yet won.
From one extreme to another: that is a fair summary of what is happening to the EUR/USD. For several months (since mid-July), investors were massively short the euro (sellers) on a scale rarely seen. They have radically changed their opinion since October and are today predominantly long (buyers). This is also explained by less-worse-than-expected economic data in the eurozone. A recession has set in, but this should be moderate in most member countries. The EUR/USD has reached a crossroads today. If the pair breaks through the psychological barrier of 1.05, it could soar up to 1.0640. But this is unlikely in the short term.
The financial markets were somewhat reassured by the presentation of the 2023 UK budget (after the failure of the September mini-budget, which caused a mini financial panic). Even so, we struggle to see how UK sterling could perform strongly over the coming months. The UK economy is in huge difficulty, with double-digit inflation, a deep and sustained recession, a dramatic drop in spending power and an energy crisis. The UK is unquestionably the sick man of Europe. This will prompt investors to take short (sell) positions on the UK currency (as has already been the case since February 2022).
Inflation is starting to become a serious problem in Japan (the consumer price index was up 3.6% year-on-year in November). If this continues, the Bank of Japan (BoJ) could find itself in a sticky position. It cannot massively tighten monetary policy in a context of high debt (the country’s public debt exceeds 260% of GDP). For the time being, the BoJ remains optimistic, arguing that inflation will start easing next spring. But this is far from certain and 2023 may be marked by the high volatility of JPY pairs in view of the country’s economic difficulties.
As long as the EUR/CHF stays below the symbolic threshold of parity, the trend remains downward. We recently adjusted our end-of-year target to 0.9600. The Swiss central bank (SNB) continues to aim for a strong franc to contain imported inflation. This has been successful to date. By basing its policy on the change in sight deposits held at the central bank, the SNB barely intervened in the foreign-exchange market in November. This reflects a stabilisation of the EUR/CHF pair and investor positions on it (in particular those of institutional investors).
Sell-side pressure on the euro has weakened in recent weeks (see our commentary on the EUR/USD, for example). But this alone does not explain the surge in the EUR/CAD (+4.24% over one month). In reality, the pair’s appreciation mainly reflects the depreciation of the Canadian dollar, which is directly linked to the drop in energy prices (the Canadian dollar is closely correlated with changes in the oil price). There is every reason to believe that the price of crude will continue falling in the short term, since demand plunges during a recession. This is a factor that could accelerate the Canadian dollar’s depreciation over the coming weeks and months.
The EUR/AUD pair was stable over the past month (up 0.11%). But the bias remains upward in the medium term. We expect the Reserve Bank of Australia (RBA) to raise its policy rate by 25 basis points at its monetary policy meeting on 6 December. Two further rate hikes of 25 basis points each are expected during the first quarter of 2023. This would raise the key policy rate to 3.60% in March 2023. The RBA is subsequently expected to leave its monetary policy unchanged. This would obviously put a brake on an appreciation of the Australian dollar in 2023.
China is using tried-and-tested methods to stimulate its economy (monetary stimulus via a reduction in banks’ required reserve ratio, releasing billions of yuan into the economy, and a currency depreciation policy). This was to be expected. The Chinese currency’s depreciation risks accelerating in the short term as the authorities seek to boost the economy, which is reeling at the end of this year from a resurgence of Covid cases and the imposition of strict lockdowns. Despite the opposition of part of the population, an exit from the zero-Covid strategy is probably unfeasible, as the vaccination rate among the most fragile populations and herd immunity are too low.
Recent measures by the Hungarian central bank appear to have paid off. The HUF has stabilised. Added to this is the reduction in risk aversion in the foreign-exchange market and the prospect of an agreement in the near future between Budapest and Brussels on the release of European funds (a meeting of the Ecofin Council scheduled on 6 December should make headway on this subject). If an agreement is reached, the HUF could even make strong gains in its wake. This would allow the Hungarian currency to regain a little more ground against the euro (down more than 9% since the start of the year).
The USD/HUF pair was still very volatile in November (fluctuation range of 33 pips!). But the downward trend was clear. The USD/HUF fell by 5.01% during the month. This does not reflect so much a return of confidence in the HUF as a broad-based depreciation of the greenback. The Dollar Index, which represents the dollar’s fluctuation against the currencies of the United States’ principal trading partners, fell by 4.19% over this period. Investors expect a slowdown in the pace of rate hikes in the US (because of the outlook for a US economic recession), explaining the dollar’s broad-based depreciation. But there is nothing to suggest today that this will continue.
Economic calendar
| DATE | CURRENCY | EVENT |
| 02/12 | USD | November employment report in the US |
| 06/12 | AUD | Central bank monetary policy meeting |
| 07/12 | USD | Third-quarter GDP in the US |
| 07/12 | CAD | Central bank monetary policy meeting |
| 09/12 | USD | November production prices in the US |
| 13/12 | USD | November consumer prices in the US |
| 14/12 | USD | Central bank monetary policy meeting and update of economic forecasts |
| 15/12 | CHF | Central bank monetary policy meeting |
| 15/12 | EUR | Central bank monetary policy meeting |
| 19/12 | HUF | Central bank monetary policy meeting |