January 2023 - Monthly Economic Outlook

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Gain an overview of the latest developments on the currency market and anticipate fluctuation risks.
It could have been worse

Analysts were predicting a plunge in the euro. In the end, this did not materialise. The European currency closed the year on a more positive note than expected. The EUR/AUD and EUR/CAD even ended in positive territory, with annual increases of 1.2% and 0.39% respectively. The EUR/USD was still down 6.66% over the year, but the pair staged an impressive trend reversal in the space of three months. The Bloomberg consensus now expects the EUR/USD to end 2023 at around 1.08 (vs 1.06 today). This is surely unrealistic. We have to humbly recognise that currency market forecasts beyond 3-6 months are unreliable. That said, the euro clearly has positive momentum, as illustrated by the positioning of institutional traders (three months ago they were predominantly sellers, but today they are predominantly buyers). 

High: 1.0695 Low: 1.0320 Variation: +2.06%

Market sentiment towards the euro is now positive. Investors forecast a moderate technical recession in the eurozone this year (two consecutive quarters of negative GDP growth). They believe, probably correctly, that the energy crisis will be less severe than expected. Today, the challenge for the euro is to find a new catalyst to escape from its fluctuation range of 1.06-07 during the holiday period. If the European Central Bank confirms in practice its extremely hawkish bias (in favour of sharp monetary tightening), this could push the euro higher in the short term. The monetary market thinks the eurozone policy rate could climb from 2% to 3.25% by June. This is unquestionably a support factor for the euro.

High: 0.8829 Low: 0.8555 Variation: +2.70%

The rally by the EUR/GBP in December reflects the change in market sentiment towards the euro (as we said in the introduction, institutional traders are today predominantly buyers of the euro). We expect sterling to continue depreciating in 2023, albeit to a limited extent. The more severe economic crisis in the UK and the fact that the Bank of England is closer to the end of its rate-tightening cycle than the European Central Bank point to a further drop in the UK currency. We expect the pair’s fluctuation range to be between 0.84 and 0.90 in the first half of this year.  

High: 146.73 Low: 138.79 Variation: -1.16%

Usually, nothing much happens during the end-of-year holiday period. Fortunately, the Bank of Japan was around to revive volatility. A few days before Christmas, the central bank took investors aback by announcing a monetary policy adjustment. Its decision to loosen its control of yields on Japanese government bonds was interpreted by analysts as a sign that the Bank of Japan will gradually exit its ultra-accommodative monetary policy to tackle inflation (at a 41-year high). The money market thinks the central bank may raise its policy rate by 10 basis points in March. This would be the first such hike in decades and could provide a strong support for the Japanese yen against its principal counterparties.

High: 0.9927 Low: 0.9820 Variation: -0.15%

The Swiss franc should be one of the winners of 2023. The depreciation of the EUR/CHF has been a little less pronounced than forecast (many analysts were expecting the pair to end the year around 0.96). But the downward bias remains intact. We think the Swiss National Bank will be among the central banks that sharply tighten their monetary policy this year. This will be a key support factor for the Swiss currency.

High: 1.4595 Low: 1.3946 Variation: +3.12%

The EUR/CAD put in another strong performance in December (+3.12%). This was partly explained by the drop in energy prices (over the same period, the WTI oil price fell by 2.40%) and the hawkish tone (in favour of sharp monetary tightening) adopted by the European Central Bank at its December meeting. This was a surprise for many market operators. We foresee a prolonged drop in commodity prices in 2023, implying that EUR/CAD still has significant upside potential.

High: 1.5979 Low: 1.5307 Variation: +2.21%

Another strong rally by the euro! The explanation is simple: the currency market thinks the monetary tightening cycle will end in Australia well before the eurozone (mainly because of concerns about the housing market amid rising interest rates). The very hawkish tone (in favour of sharp monetary tightening) adopted by the European Central Bank in December also had the effect of driving up the single currency. At present, the positioning of institutional investors is unambiguous: they are long (buyers) of the euro relative to the other principal currencies.

High: 7.4553 Low: 7.2875 Variation: -0.37%

We expect the appreciation of the EUR/CNH to continue in the first quarter of this year. China needs a weak currency to stimulate its exports, as in the good old days. The ongoing post-lockdown reopening (which is set to accelerate from 8 January) is positive for the economy in the short term. But we are cautious about the long-term consequences. Some models (which should be viewed with caution) suggest that several million Chinese could die of Covid. This would have a damaging effect on the confidence of economic agents (and could even end with the re-introduction of strict health measures). At this stage, it is still difficult to know what China holds in store for us in 2023.

High: 419.39 Low: 399.67 Variation: -1.01%

At its final meeting of 2022, the Hungarian central bank reiterated its commitment to fighting inflation. It adopted a slightly more hawkish tone than expected (in favour of sharp monetary tightening), probably linked to the upward revision of inflation forecasts in 2023. This works in favour of the HUF. Other factors should drive a (probably limited) appreciation of the Hungarian currency. These include the drop in gas prices on the wholesale market (this was a key driver of many central and eastern European currencies in recent months) and the forthcoming improvement in relations between Budapest and Brussels (inevitable in our view). The cruising zone for the EUR/HUF zone should be around 400 in the short term.

High: 398.15 Low: 376.05 Change: -3.76%

The drop in the USD/HUF mainly reflects the near wholesale depreciation of the US dollar in recent weeks. The dollar index has lost 7% of its value in the space of three months. If the zone of 103 is not maintained, the greenback’s depreciation may accelerate (including against the HUF). We expect the US dollar to continue performing poorly during at least most of the first quarter of this year. If Hungary manages in parallel to improve its relations with the European Commission, this could pave the way for a sharper appreciation of the HUF in the weeks and months ahead.

Economic calendar

06/01 USD December Jobs Report by the Department of Labor 
08/01 CNH China classifies Covid as a category B infectious disease, coupled with a less strict health protocol
12/01 USD December consumer price index in the US 
16/01 EUR ZEW economic sentiment index in Germany
18/01 EUR Final estimate of the December eurozone consumer price index 
24/01 HUF Central bank monetary policy meeting
26/01 JPY Central bank monetary policy meeting