November 2022 - Monthly Economic Outlook

Gain an overview of the latest developments on the currency market and anticipate fluctuation risks.

Soft patch for the US dollar

In October, the dollar index (which measures the US dollar’s fluctuation against the currencies of its principal trading partners) fell by 4%, its biggest monthly drop since the start of the year. This is good news: a strong dollar is generally synonymous with flagging economic growth and difficulties in emerging countries. But the US dollar’s upward cycle is probably not over. On an annualised basis, the dollar index has appreciated by 16.8%. This demonstrates there is no alternative to the US dollar in an economic world gradually sinking into recession.

EUR/USD
High: 1.0089 Low: 0.9734 Variation: +2.52 %

According to the COT (Commitments of Traders) report published by the CFTC (Commodity Futures Trading Commission), speculators are mostly bullish about the euro – a first since the start of June 2020. But we doubt this change of heart will last. Too many macroeconomic risks are weighing on the eurozone in the short term. These include the recession in Germany, which could be massive, the risk of rolling electricity cuts in several countries, climbing inflation that is spreading into all areas of the economy and, here and there, the bursting of housing market bubbles. In this context, the European Central Bank has no choice but to be in automatic pilot mode and to continue tightening its monetary policy (rate hike of 75 basis points in October and an expected rise of 50 basis points in December).

EUR/GBP
High: 0.9070 Bas: 0.8608 Variation: -3.51%

It would be mistaken to see in the sharp slide in the EUR/GBP pair in October the sign of a return of confidence in the UK economy. The CFTC’s COT report shows that speculators remain mostly bearish on sterling. This has not changed since March 2022. The UK economy has all the characteristics of an emerging economy: a plunge in its currency against the dollar, political instability, a housing market bubble, unprecedented energy bills, a soaring current account deficit (which measures dependence on foreign investors), etc. We continue to steer clear of UK assets out of caution and recommend adopting a solid currency hedging strategy if you are exposed to the UK currency. An important day for sterling will be 17 November when the new government is due to present the 2023 budget (the mini-budget of short-lived Prime Minister Liz Truss caused panic in the markets at the end of September).

EUR/JPY
High: 148.4 Low: 143.67 Variation: +4.16 %

In recent weeks, the Bank of Japan has pursued a direct intervention strategy in the foreign exchange market to shore up the Japanese yen. The objective is to boost the country’s currency against the US dollar (but this also has repercussions on the EUR/JPY). This strategy has been a dismal failure, to put it mildly. Over the course of last week, the central bank injected 30 billion dollars (by selling dollars and buying yen) without managing to slow the slide in the local currency. As we have long known, uncoordinated central bank interventions never succeed. We therefore expect the yen to continue depreciating over the short and medium term.

EUR/CHF
High: 0.9973 Low: 0.9430 Change: +3.95%

After a prolonged decline in the pair, it is not surprising to see a technical recovery. This is what happened in October (+3.95%). But investors lacked conviction. The rally lost impetus as the pair approached parity. We remain bearish on the EUR/CHF. The Swiss franc is likely be a perfect safe haven in the months ahead when the economic risks we are all aware of finally materialise in the euro. What’s more, the Swiss Confederation, though not completely sheltered from global economic problems, has a fairly positive scorecard, with inflation remaining contained in particular. We have an end-of-year target of 0.96.

EUR/CAD
High: 1.3698 Low: 1.3124 Variation: +2.03%

It was the turn of the Bank of Canada (BoC) to pivot its monetary policy in October. Contrary to expectations, it raised its policy rate by just 50 basis points, whereas the consensus was forecasting a 75 basis-point hike (which made sense in view of the latest inflation figures). But this did not take into account the numerous macroeconomic risks that are beginning to worry the central bank (with a real risk of a bursting of the housing market bubble). In the wake of the BoC, the Mexican central bank also decided to pivot its monetary policy this week. This is a fairly positive signal from the standpoint of the EUR/CAD and it could continue to appreciate in the short term.

EUR/AUD
High: 1.5695 Low: 1.4838 Variation: +3.30%

The Reserve Bank of Australia (RBA) met on 1 November to adjust its policy rates. According to a survey published by Reuters this week, close to 90% of analysts questioned expect a hike of just 25 basis points (like last month) to 2.85%. In the short term, the RBA is likely to continue this small steps strategy to ensure that tighter financial conditions do not derail the housing sector, which is in a bubble situation. The RBA was the first central bank to pivot (by focusing more on the risks weighing on growth than on inflation). It is not the last. Two other central banks have since gone down this path: the Bank of Canada and the Mexican central bank.

EUR/CNH
High: 7.2953 Low: 6.9167 Variation: +4.52%

The 20th Congress of the Chinese Communist Party did not contain any major surprises. As expected, there will be no exit from the zero-Covid strategy in the short term. Chinese authorities now favour a slow depreciation of the CNH to help stimulate exports. But they will immediately contain any volatility they consider excessive. On the basis of available market data, it seems that Chinese commercial banks (at the government’s demand) intervened this week to boost the local currency’s exchange rate to curb downward pressure. This situation is likely to continue in the short term.

EUR/HUF
High: 432.85 Low: 406.69 Change: -1.28%

Faced with the continued slide in the Hungarian currency, the central bank announced on 14 October a series of original measures aiming to ease pressure on the exchange rate, including a commitment to provide foreign currencies directly to energy importers. These announcements temporarily reduced pressure on the currency. But their lasting effect on the exchange rate is more than uncertain given that inflation topped 20% in September, the efficacy of monetary policy is limited by a chronic liquidity glut and the current account deficit continues to deteriorate. We do not rule out a rapid re-appreciation of the EUR/HUF pair.

USD/HUF
High: 447.70 Low: 404.99 Variation: -3.42%

In the context of the falling dollar index, it is not surprising that the USD/HUF pair lost ground in October (-3.42%). This is also explained in part by the measures taken on 14 October by the Hungarian central bank (see our commentary on the EUR/HUF pair). However, we doubt that the depreciation of the USD/HUF will last. We remain in a financial environment where the dollar is king. What’s more, difficulties specific to Hungary (in particular the liquidity glut) limit the efficacy of monetary policy. The pair is likely to return to previous high points if a global recession materialises.

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