Do you know what “prudential monetary financing” is? It is when a central bank has no choice but to intervene on the market to avoid soaring government borrowing costs. This was what happened in the UK last week. We could see other central banks follow the same path as a matter of urgency, given the high levels of public debt (which normally lead to higher borrowing costs). Central banks are also taking steps to support their currencies, which are weakening against the US dollar. Some are luckier than others. In Japan, interventions are currently effective. In India, for example, they are more mixed. We are entering a period of high volatility on the forex market. This is a new scenario compared with previous years.
It is clear that the euro is undervalued against the US dollar. It is also clear that in normal times this could trigger a strong technical rebound. But as we have seen several times since July, every attempt to rebound has ended in failure. This was again the case last week. The prolonged depreciation of the euro is inevitable. Breaching the 0.95 threshold (which serves as both a technical support and a major psychological level) could lead to the decline being extended towards 0.90 by the end of the year. The European Central Bank (ECB) meeting at the end of the month will not change anything.
The pound sterling is in a bad position. Along with the Japanese yen, it is one of the two major currencies against which we have recently seen strong speculation. The Bank of Japan’s intervention to support the yen seems to be effective. This is not the case for the pound sterling. Two factors driving the pound lower are the UK’s economic collapse (with recession expected for five quarters!) and the flight of foreign investors (essential to ensuring the country’s standard of living). It is not unlikely that the EUR/GBP will reach parity in this environment. A month ago, this would have been completely out of the question. It is now a credible scenario.
Less than fifteen days ago, the Bank of Japan (BoJ) intervened on the forex market to support the Japanese yen after months of hesitation. In concrete terms, on the Ministry of Finance’s orders, Japanese banks are buying yen and selling dollars. The BoJ set a price level not to be exceeded of 145 yen to the dollar. This seems to have slowed speculation, for the time being. However, it did not have any significant effect on the EUR/JPY. This continues to trend upwards on a monthly basis. This is partly due to a repositioning of buyers on the euro. In the medium term, we are still bearish on the pair, given that the energy crisis in Europe will have a negative impact on the euro’s exchange rate.
Just like for the EUR/USD, there is a clear trend for the EUR/CHF. We are facing a prolonged depreciation phase, with the year-end target maintained at 0.91. The Swiss franc is supported both by risk aversion (its safe haven status) and by the Swiss National Bank’s more restrictive monetary policy (unimaginable a few months ago). Conversely, the euro is being negatively impacted by monetary tightening that is considered too timid, inflation reaching 10% year-on-year in September (which means the eurozone’s population will be poorer) and an energy war with Russia. These factors argue in favour of a decline in the EUR/CHF.
The euro rebounded sharply at the end of September against the Canadian dollar (we saw a similar movement against the Australian dollar). We know, however, that when a movement is exacerbated on the forex market, it does not last. We are still bearish on the EUR/CAD in the medium term. We will need to monitor the 1.2960-70 area, which could trigger a further technical rebound in the short term.
The appreciation of the euro against the Australian dollar reflects two factors: 1) the perception that the Australian central bank is close to the end of its monetary tightening cycle (a major support factor for the Australian dollar in recent months); 2) the fall in commodity prices (which can be explained by the fairly logical drop in demand in times of recession); and 3) a repositioning of currency traders on the euro (many are long after a significant period of euro depreciation). However, we doubt that this upward movement will last. The euro faces a difficult winter.
The Chinese central bank was the other major financier to intervene on the forex market last week (presumably via China’s state-owned banks). This helped to curb the sharp and unexpected collapse of the CNY against the USD. Meanwhile, the EUR/CNH remains fairly stable, at between 6.80 and 7.00. Volatility is likely to remain low in the short term. China has no interest in seeing abrupt movements in the EUR/CNH just before the 20th Congress of the Chinese Communist Party, which will begin in mid-October.
Forex traders are in a trade-off situation. The euro is undoubtedly being weakened by the recession that has probably already started and by the energy crisis. But against the forint, the euro looks like a stronger currency. Several factors are having a negative impact on the forint: the ongoing conflict between Brussels and Budapest (although we have recently seen positive signs on both sides), the high energy dependence on Russia and also the fact that the Hungarian central bank is under strong political pressure. All this will push the EUR/HUF to near-term highs, probably in the 430-440 area.
In times of crisis, it is better not to be a secondary currency. The forint is paying the price for this, reaching a new record last month of 437.36. Given the current market environment, no matter how much the Hungarian central bank decides to raise rates, we believe this can only have a positive effect on the forint in the short term, at best. We are in a market that buys dollars, with tensions on the credit market (in the UK and in Continental Europe) and with a faltering global economy (a global recession is almost certain). In the coming months, we will see a flight of capital that will be recycled in the US. For the USD/HUF, this is likely to result in new records. A USD/HUF peak at 450 may no longer be an absurd target.
Economic calendar
| DATE | CURRENCY | EVENT |
| 04/10 | AUD | Central bank meeting |
| 05/10 | USD | ADP private employment survey in the US for September |
| 07/10 | USD | NFP employment survey in the US for September |
| 13/10 | USD | US Consumer Price Index for September |
| 16/10 | CNH | Opening of the 20th Congress of the Chinese Communist Party |
| 18/10 | CNH | Publication of Chinese GDP for the third quarter |
| 25/10 | HUF | Central bank meeting |
| 27/10 | EUR | Central bank meeting |