Currency markets have been highly volatile in recent days. The South Korea won plunged to a two-year low against the dollar after martial law was imposed in South Korea. The Chinese yuan continued its slow slide against the greenback (-5% in the space of two months). This is a sign that the trade war will also have consequences in the currency markets. In Europe, the euro’s depreciation is a sign of growing wariness among foreign and local investors, who prefer to invest their capital on the other side of the Atlantic where the economy is in fine form and political risk is absent.
The financial attractiveness of the US is increasing to the detriment of the eurozone. Yields on debt securities and equities are far higher on the other side of the Atlantic. Against the backdrop of political risk, funds are flowing out of European assets, especially French ones, and being redirected into purchases of US assets. This trend may well continue in the months ahead. There is no need to look further for an explanation of the euro’s recent depreciation. We think a drop in the pair to around 1.0350 is credible in the medium term.
There has been some movement on this currency pair, which was considered fairly stable. The euro is on a clear downward trend and we do not expect the situation to improve over the coming months (slow depreciation of the EUR/GBP pair). The growth differential between the two sides of the channel is a key factor explaining the pair’s depreciation. According to the IMF’s forecast, the UK will record the strongest growth in Western Europe next year.
The GBP/USD has fallen for eight weeks in a row, which is unusual. Unsurprisingly, a technical recovery has followed. But this will probably be short-lived. Following Trump’s election, there is no longer any doubt that the dollar will remain strong and overvalued against the other principal currencies next year. This is also true against sterling.
The Central Economic Work Conference is due to take place in the next few days – the final date has not been set. This is a crucial meeting since the Chinese government will use it to outline its economic priorities for the coming year. When it wraps up, only the key intervention areas will be unveiled, with probably a particular focus on real estate and the export industry. We will have to await the annual session of Parliament in March 2025 to obtain quantified figures on the growth target and the investment sums allocated. Be patient. As regards the exchange rate, China will probably continue allowing its currency to depreciate against the US dollar, whereas it is likely to be fairly stable against other currencies.
Surprise, surprise! A fortnight ago, the president of the Swiss National Bank, Martin Schlegel, raised the possibility of a return of negative rates to slow the Swiss franc’s appreciation. This is certainly not a credible option in the short term. We think the central bank will initially try to stabilise the EUR/CHF at around 0.95. But if it fails to achieve this, it might turn to negative interest rates.
This was a very bad month for the euro, unsurprisingly. One piece of bad news followed another: political risk in France and, to a lesser extent, in Germany, services and manufacturing indicators in recessionary territory, capital outflows, and so on. On the monetary front, we do not foresee a major differential between the eurozone and Canada (25 basis point rate cut in both cases in December).
We expect the Reserve Bank of Australia to cut its policy rates later than planned – in May 2025 versus February 2025 initially – because of a far more solid job market than anticipated.
The euro has been through some difficult weeks lately amid a cocktail of PMIs in recessionary territory, French political risk and the yield differential between European and US assets. This has also been the case against the Japanese yen. US hedge funds have recently been selling euros to buy yen in anticipation of a fresh rate hike by the Bank of Japan at its 19 December meeting.
More monetary stimulus is certainly needed in Hungary in the months ahead. Although consumer spending continues to grow at a decent pace, the weakening of consumer confidence seems to suggest that this positive momentum may stall. On the business front, the situation is still negative. There has been no improvement in investment because of still insufficiently full order books and a weakened financial situation in many business sectors. The only hope is that new governmental programmes due to be implemented next year will inject a little growth. The outlook is broadly gloomy, explaining the Hungarian currency’s depreciation in recent months.
Our conviction for next year is that the US dollar will remain strong because of the outperformance of the US economy and stockmarket, the positive effects of Trump’s economic policy on the country’s attractiveness and a global climate of risk aversion amid heightened geopolitical risk. In concrete terms, this should drive a continued appreciation of the USD/HUF in the months ahead.
| DATE | CURRENCY | EVENT |
| 06/12 | USD |
US employment figures in November |
| 10/12 | AUD |
central bank meeting |
| 11/12 | CAD |
central bank meeting |
| 12/12 | CHF |
central bank meeting |
| 12/12 | EUR |
central bank meeting |
| 16/12 | HUF |
central bank meeting |
| 18/12 | USD |
central bank meeting |
| 19/12 | JPY |
central bank meeting |
| 19/12 | GBP |
central bank meeting |