G10 Currencies catch up: More data needed for Central Banks decision

Last week was a relatively quiet week with main events being the RBA and FOMC meeting minutes and Canadian Inflation prints which fell short of forecast. In the last two weeks, we have seen how markets decided to trade the UK data and bid the pound despite the technical recession.

In this article:

1.       Canada

2.       Australia

3.       Euro Area

4.       United States

5.       United Kingdom

Canada

Rate cuts for Canada is open for April´s meeting as Inflation seems to be easing. All inflation data printed last week fell. Markets are pricing that in and rates differentials are widening which will lead to a lower Canadian dollar in comparison with other G10 currencies.

BoC has stated that they intend to keep rates high to ascertain that inflation does reach the targeted level.

Raw Material Prices MoM and YoY (Jan) provided mixed signals to the market with MoM data having a substantial increase of 1.2% when forecast was for 0.7% increase; and YoY data contracted (-6.4%) when forecast was for (-7.4%). The markets saw this as a holiday season effect which shall fade away soon, but only data and time will tell.

PPI MoM (Jan) contracted in line with expectation (-0.1) and YoY (Jan) contracted more than expected (-2.9) when expectation was to contract (-2.7), which shows that inflationary pressures are easing and that in turn gives relief to RBA officials and confidence to market participants that rate cut is on the table.

New Housing Price Index MoM and YoY (Jan) data have also contracted at (-0.1%) and (-0.7%) respectively.

Australia

Previous week was relatively quiet for Australia with RBA meeting minutes being the main piece of data printed. Which stated nothing more than markets had already been pricing.

The Chinese New Year has ended but nothing much has been made from China to suggest that their economy will rebound at a faster pace than expected, which dampens the short-term outlook for Australian economy but aids the RBA in their inflation control mission.

On Wednesday, the Westpac Leading Index MoM (Jan) printed at (-1%) when expectation for an increase of 1%. Wage price Index QoQ and YoY for 4th quarter gave off mixed signals.

Australia is a high Beta country which will greatly benefit when the Fed cuts rate; and should the next inflation figures ticks higher, the RBA is expected to keep rates high for longer and thus increase the long-term support for the Australian dollar.

As for this week, it shall be quitter than previous as nothing much is expected to occur nor in the calendar.

Euro Area

Nothing much has changed from the EU. Data is still giving mixed signals with inflationary pressures showing signs of persistence and while economic activity and S&P PMI data for Germany – the heart of EU – still decreasing.

Inflation figures has decreased, and PMI data shows signs of continuing slowdown in the group and German HCOB Manufacturing PMI flash figures for February for has printed unfavourable as well, contracting to 42.3 when expectation was for 46.1 (which was bad nonetheless).

Italy´s inflation figures pushed slightly higher which adds pressure to ECB officials.

Markets in EU are very volatile now but we can see signs of bullish positioning in the FX market in favour of EU as expectation for rate cuts increase in the long run.

As for EURUSD, it´s short term movement is dependent of US data.

United States

Previous week had many Feds officials’ speech but nothing to aggressive on the rates side of things.

The meeting minutes showed that, the Fed does not wish to cut rates as they fear second round inflation, and this affirms that there will not be a rate cut in the next Monetary policy meeting.

The US Dollar was unable to advance following the meeting minutes release shows that the hawkish stance was priced in. Markets now expect less rate cuts this year as US economy is still strong. Jerome Powel has been stating that inflation is its path to targeted level, but the risks are still there. But one thing that the market is sure of is that there will be a rate cut this year.

As for equity markets, Nvidia is one of the few companies carrying the entire US market. This is due to AI bubble going around as FOMO is heavily imbued in this industry; and due to this, as AI companies in US are doing great, they will keep on expanding and hiring which will then put money in people´s hand, thus spending is due to continue. The fact Nvidia outperformed again, shows that we should not expect rate cut anytime soon.

Due to this, markets are not operating as usual because in an increasing interest rate environment, equity markets should not be hitting all-time highs.

For this week, we have several Federal Reserve official speaking which will aid in setting the tone for the upcoming meeting especially given that we have key US economic data this week. At RC we do not expect Fed officials to be too hawkish.

There is very little reason to be short in the US Dollar in the short-term. The economy is strong and equity market shows no sign yet of reflecting the normal rate hiking cycle where equity markets contracts. There is a strong risk appetite and of course, this is short lived as rates settles down properly in the US market and Nvidia stops outperforming in this AI bubble.

United Kingdom

Consumer confidence in the UK continues negative but there is stabled outlook for the rebounding of the economy. Consumer confidence is a key factor for how the UK economy recovers in 2024.

Currently, the market is bullish on the Pound solely because rates is high, and UK Treasury Gilts is attractive.

The BOE had many of their officials provide speech last week and is expected to cut rates in August which is after the ECB and the Fed.

Now, one thing that can aid the UK is the opposition labour party comes back to power to pursue a policy of reapproaching talks with EU which in turn will boost the economy and increase GDP.

In all, given the bleak economic situation of the UK and consumer confidence – which is a key factor to coming out of technical recession – is still not favourable. The Great British Pound has a long- term upside against the USD, JPY and Swiss currencies and the equity market is due to pick up from mid-year onwards. The growth seems to be lingering but risk appetite is expected to remain resilient as Service PMI still strong.

Looking at the FX market, GBPUSD current behaviour represents the optimistic view that the market has for UK economy once central banks start cutting rates which shall put markets in a “risk on environment” and thus sending GBPUSD to the upside together the UK´s equity market.

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