2023-12-16 01:46:00
Weekly Commentary on the Foreign Exchange Market: Rising expectations for an interest rate cut by the Federal Reserve dominate the market, and the U.S. dollar index weakens and the Canadian dollar continues to strengthen
On Friday (December 15), the U.S. dollar suffered heavy losses this week and returned to its August 10 position under pressure from increasing prospects of interest rate cuts next year. The Federal Reserve’s dovish shift and risk-on sentiment continue to weigh heavily on the dollar. USD/CAD fell further below 1.3400, its lowest level since mid-August, as the US dollar continued to sell off and the recent good recovery in oil prices supported the Canadian dollar. CAD/CNY continues to climb to its early November position.
The U.S. dollar index, which measures the U.S. dollar once morest six major currencies, rose 0.53% on Friday and is now at 102.51.
(USD Index chart,)
In a solid week for central banks, traders learned at Wednesday’s meeting that monetary policy tightening may be over, before Federal Reserve Chairman Powell said discussions on a rate cut would begin, providing a clearer idea of the timing of the move. .
The latest interest rate forecast released by Federal Reserve officials on Wednesday showed that interest rates are expected to be cut in 2024, causing the dollar to fall sharply.
The Federal Reserve has signaled a turnaround, with officials releasing forecasts for a series of rate cuts next year. Federal Reserve Chairman Jerome Powell said he was ready to resume raising interest rates if price pressures return, but he also said the topic of easing policy was raised at this week’s meeting. Powell’s speech was also interpreted as taking a more dovish tone, saying that the tightening of monetary policy may be over and discussions of interest rate cuts will “come into view.” Analyst Sebastian Boyd commented, “To be fair, what Williams said is also what Powell said at this week’s meeting. Whether this will be a good antidote to the rapid rise in bonds remains to be seen, but considering that bonds have trend, such suppression may play a role in stabilizing the market.”
“This is somewhat similar to the tone we heard from Powell earlier this week, but it somewhat reinforces the fact that the Fed is still very much a Banks that are very dependent on data and don’t really recognize what the market is pricing in the economy.” Rai also noted that the dollar’s moves this week were largely due to a rebalancing of positions that were heavily tilted towards the greenback and focused on specific currency pairs such as once morest the Japanese yen. “This is a story regarding overleveraged markets and skewed positioning that needs rebalancing more than any dovish interpretation of Powell’s comments earlier this week,” he said.
The “hawkish” speeches of several Federal Reserve officials today overturned market expectations for an interest rate cut. The dollar rebounded on Friday, but the index is still expected to post its worst weekly performance in a month.
John Williams, the “third in command” of the Federal Reserve and President of the Federal Reserve Bank of New York, today refuted the statement that the Federal Reserve has begun discussions to cut interest rates. He said, “We are not really discussing a rate cut. It is too early to consider a rate cut in March. The question is whether we have adjusted monetary policy to a restrictive stance enough to ensure that inflation returns to 2%.”
“Fed mouthpiece” Nick Timiraos commented on Williams’ speech, “The Fed is focused on whether it is doing enough to raise interest rates, which is obviously a rebuttal to the atmosphere of interest rate cuts at Thursday’s Fed press conference. Cutting interest rates is not for us. topic of discussion regarding what is going to be done’.”
Earlier this week, traders priced in positive expectations for a rate cut, with the first rate cut likely to occur in March and a 145 basis point cut in December.
Chris Weston, director of research at Pepperstone, said the Fed’s statements have led the market to anticipate the timing of an interest rate cut in 2024, with many participants now expecting the rate cut to begin around March next year.
According to the CME FedWatch tool, the market currently expects a 75% chance of the Fed cutting interest rates in March.
Hamish Pepper, fixed income and currency strategist at Harbor Asset Management, said this market pricing reflects an overly optimistic view that U.S. core inflation can return to 2% without massive economic pain. “The risk to the market is that policy rates may need to remain at higher levels for longer than expected.”
After Williams’ speech, the U.S. 10-year benchmark Treasury bond yield fell 1.35 basis points to 3.9073%. It traded in the range of 3.9709%-3.8924% during the session, with a cumulative decline of 31.84 basis points this week. The two-year U.S. Treasury yield rose 5.67 basis points to 4.4491%. It traded in the range of 4.3546%-4.4827% during the session, falling 27.18 basis points this week. JP Morgan lowered its forecast for U.S. Treasury yields, and the Federal Reserve’s dovish signal prompted JPMorgan’s economic team to lower the Fed’s interest rate forecast by the end of 2024 by 25 basis points to 4.1%. In a report on Thursday, JPMorgan Chase predicted that the U.S. 10-year Treasury yield will be 3.65% by the end of 2024, a decrease of 10 basis points from the previous forecast. JPMorgan Chase expects the U.S. 2-year Treasury yield to fall to 3.25%, compared with the previous forecast of 3.5%.
The U.S. economic calendar data on Friday was biased downward. The U.S. services PMI in December hit the highest level since July, and the manufacturing industry is still a drag on the economy. Chris Williamson, chief business economist at S&P Global Market Intelligence, said data showed the U.S. economy picked up slightly in December and ended the year at its fastest pace since July. . However, although the U.S. economy improved in December, the PMI survey showed that the country’s fourth-quarter GDP growth was quite weak. Loose financial conditions will help boost demand for services, business activity and employment, as well as improve expectations for future output. However, rising costs of living and caution regarding spending by households and businesses mean that overall growth in the services sector remains well below levels seen during the spring and summer recovery in travel and leisure activity. Meanwhile, manufacturing remains a drag on the economy, with orders falling at a faster pace, prompting factories to cut production, lay off workers and scale back input purchases. Therefore, despite the economic rebound in December, surveys show that fourth-quarter GDP growth remains weak.
U.S. industrial output rebounded in November, reflecting a pickup in activity at automakers and parts suppliers following the end of a UAW strike. Data showed manufacturing output rose 0.3% last month, lower than expected, driven by a 7.18% surge in automobile production. However, excluding automobiles, manufacturing output fell 0.2%. Total industrial production, which includes mining and utilities, rose 0.2%.
The U.S. Congressional Budget Office: Revised its 2023 U.S. real gross domestic product (GDP) growth forecast to 2.5% from 0.9% in July, reflecting data as of December 5. The average unemployment rate is expected to be 3.9% in the fourth quarter of 2023, and 4.4% in the fourth quarter of 2024 and 2025. The core personal consumption expenditures price index is forecast to rise by 3.4% in 2023, lower than the 4.1% expected in July; the core personal consumption expenditures price index is forecast to rise by 2.4% in 2024.
Bank of America strategists led by Sebastian Raedler said falling inflation, dovish central bank repricing and lower real interest rates have taken hold in the face of slowing economic growth. The resilience of hard data from the post-pandemic order backlog has supported stock markets and earnings per share forecasts, keeping hard data elevated relative to soft data, but this is inconsistent with subdued demand in soft data such as PMI new orders. Support from the backlog of orders is expected to weaken, further affecting the softer data.
Strategists at TD Securities now expect the Fed to begin easing monetary policy in May rather than June next year as it focuses on achieving a soft landing first. TD Securities analysts Oscar Munoz and Gennadiy Goldberg said the FOMC’s policy will be less restrictive and signs of an “increasingly improving inflation outlook” prompted it to change its Fed policy expectations. The bank still expects that growth concerns may cause the Federal Reserve to focus policy easing in the early stages of 2024, with a cumulative rate cut of 250 basis points expected, including 200 basis points next year.
Atlanta Fed President Raphael Bostic said on Friday that a rate cut was not imminent but had directed staff to begin developing possible principles and thresholds to guide the process. He does not expect the Fed to cut U.S. benchmark interest rates until mid-2024. He is the first Fed official to reveal the timeline for possible interest rate cuts following the Fed released a more-than-expected hawkish dot plot in September. Two 25 basis point rate cuts are expected in 2024, with the first coming “sometime” in the third quarter, assuming progress in inflation expectations continues. In an interview with the media, he said: “The Federal Reserve needs to be cautious, patient and determined to achieve the goal of reducing inflation to 2%.” This statement echoed the tone of the comments of colleagues at the Federal Reserve. Public information shows that Bostic is one of the 2024 FOMC voting committee members.
U.S. President Biden’s economic adviser Brainard said there is every reason to expect more progress in inflation, the feasible space for a soft landing of the U.S. economy has become larger, and financial markets reflect a more positive view of the economic development path.
Chicago Fed Chairman Goolsby said the Fed may need to shift its focus to employment indicators and would not rule out the possibility of cutting interest rates at next March’s meeting. He believes that as inflation drops back to the 2% target, more attention should be paid to the risk of rising unemployment. He said: “I would support a rate increase if the data supports it, but if inflation continues on its current path, a rate cut may be appropriate. Rates are expected to be lower than today next year, but not significantly lower.”
USD/CAD fell for the third consecutive trading day, falling to its mid-August position, now trading at 1.33648, down 0.30%.
(USD/CAD exchange rate chart,)
On Friday, Canada released a series of economic data, among which the annual rate of wholesale inventory in October was 2.1%, compared with the previous value of 0.9%; Canadian overseas investors bought Canadian securities on a net basis in October -15.75 billion Canadian dollars, and Canada’s new housing starts data in November was 21.26 Thousands of households.
Before the Bank of Canada Governor’s speech, Canadian economists expected Bank of Canada Governor Macklem to once once more push back on expectations of an interest rate cut in early 2024. BMO Capital Markets expects McCollum to at least reiterate that the central bank is ready to raise interest rates once more if inflation fails to cool as expected. Scotiabank economist Derek Holt said the Fed’s decision this week might complicate McCallum’s messaging. The story is different in Canada, though, where rising wages amid sluggish productivity and immigration-driven population growth have pushed housing inflation to historic highs.
The Bank of Canada increasingly believes interest rates are restrictive enough. Bank of Canada Governor Macklem said that inflation is still too high, and if we do not take sufficient measures, we may have to further raise interest rates; we will not give up the option of further raising interest rates; the data since the last decision has become increasingly Yue points to the fact that monetary policy is working; we haven’t discussed rate cuts yet. McCollum said, “The Fed will take necessary measures, and we will focus on the necessary work.” At the same time, he expects economic growth and employment to improve following 2024, and inflation will be close to the 2% target. McCallum said, “The 2% inflation target is in sight; we are not there yet, but conditions are increasingly conducive to achieving it. Once we are confident that we are clearly on the path back to price stability, we will consider if and how Interest rates can be lowered.”
The Canadian dollar has appreciated recently. Still, economists at National Bank of Canada don’t expect the Canadian dollar to strengthen further. They said, “There is little room for the Canadian dollar to appreciate before the second half of 2024. Looking ahead, given our forecast of a global economic slowdown and the possibility of deeper interest rate cuts in Canada relative to the United States due to weak domestic demand, we believe that the Canadian dollar will not There will be too much support. Given the scenario of a Canadian recession in the first half of 2024, we now expect USD/CAD to rise to 1.45 in the coming quarters and see no room for Canadian dollar appreciation before the second half of 2024 .”
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