A Bad Week

The information presented in this publication is communicated to you for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and in no case should it serve as a basis or be considered as an incentive to engage in any investment.

The macro point

Last week was characterized by a series of disappointing statistics for the American economy, immediately reigniting fears of a recession. The dollar suffered as a result. Additionally, there's seasonality to consider. The US currency tends to fall in April before recovering in May. However, we doubt that there are enough upside catalysts for the EUR/USD to sustainably break free from the area around 1.10 in the short term. Before delving into the macroeconomic details, we wanted to reach out to you. We've received a lot of positive feedback on the Weekly Currency Update, and we thank you for it. If you're a regular reader of this market letter, you're likely concerned with international payments and foreign exchange risk management. These are, in fact, our areas of expertise even before providing market information. As a Banking Operations and Payment Service Broker and Financial Investment Advisor, Mondial Change successfully supports over 1,000 companies in managing their foreign currency operations. Our partner network allows us to address all your issues: forward exchange lines, currency account architecture, exotic currency transactions, currency hedging and restructurings, ERP connections, advice... all while offering very attractive spreads for your executions. How about discussing your needs? You can book a 30-minute slot with our experts by clicking here: I book a call with the trading room. We look forward to meeting you! It was rather a bad week for the American economy (except for last Friday's employment report). The ISM manufacturing index, ISM non-manufacturing index (which covers the strategic services sector), the ADP private employment survey, and new job offers all came in significantly below consensus. In the services sector, new orders fell so much that it almost wiped out January’s good performance. New job offers (which indicate how overheated the labor market is) dropped to 9.93 million in February against an expected figure of 10.5 million. The good news, if we can call it that, is that inflationary pressures are logically beginning to ease (which is expected if the economic dynamic slows). Prices paid in the manufacturing sector fell into contraction territory in March (49.2 after 51.3 in February). Unsurprisingly, these poor figures have fueled recession fears across the Atlantic. They have also altered expectations concerning the positioning of the American Federal Reserve (Fed). There's no FOMC meeting (the body that decides on benchmark rate policy) in April. The next one is scheduled for May. To say the least, the forex market is divided regarding the outcome of the meeting. Based on money market futures contracts, 50% of investors believe that the Fed will raise its benchmark rate. The rest anticipate that it will pause (which would constitute a pivot from the monetary policy followed so far). Worse, investors anticipate that the Fed’s benchmark rate will be at 4.18% next December. This means they believe that the US central bank will have no choice but to cut rates this year (the benchmark rate currently is between 4.75% and 5%). Market expectations evolve significantly with the indicators. Although they certainly influence the short-term evolution of currency pairs (as was the case last week for the EUR/USD in particular), their long-term impact is weak. From our perspective, even if the American economy shows clear signs of slowing (which will surely intensify in the short term due to credit restriction), nothing allows us to anticipate a recession and thus even less a cut in benchmark rates to support the American economy. As several FOMC members have reminded us in recent sessions, it is still too early to prejudge the evolution of American monetary policy. Visibility is low for the meeting next May. How can we know where the American economy will be by the end of the year? The lack of economic visibility makes central bank decisions now less predictable (in theory, this leads to more currency volatility). This is the main lesson we draw from last week. The Reserve Bank of Australia was supposed to raise its benchmark rate by 25 basis points. It finally decided to pause monetary policy. Conversely, the central bank of New Zealand raised rates more than expected (50 basis points against a consensus of 25 basis points). We observe a rather rare divergence in monetary policy between Australia and New Zealand. It’s a weak signal indicating that other central banks might surprise in the coming months – depending on their assessment of growth dynamics and inflation dynamics. In Australia, the central bank judges that inflationary pressures are decreasing sufficiently and that the decline will continue. In New Zealand, its counterpart considers that it is still necessary to increase the cost of money further for inflation to recede. There is no right method. We are in an experimental phase at this level. In the medium term, this could result in a sustained return of volatility and carry trade strategies that take advantage of interest rate differentials between currencies (this type of strategy is still operational on the yen, which suffers from ultra-low rates).

Technical point

On the foreign exchange market, the EUR/USD tried to break out of the 1.0930-35 zone without really succeeding. The pair remains below 1.10. However, the euro benefited from a favorable market environment last week. Linked to the macroeconomic information we mentioned in the introduction, traders are betting on the continuation of the tightening process of the European Central Bank (ECB) while the Fed could trigger a pause. The dollar is also generally weak during this period (seasonality effect). But importantly, after the traditional April decline, a recovery usually occurs in May for the dollar. Considering that market expectations are bound to fluctuate based on new statistics that will be released and that seasonality will likely again favor the dollar next month, one can doubt that the recent upward movement of the EUR/USD is sustainable and the EUR/USD still lacks a catalyst to really go above 1.10.

The supports and resistances displayed below respectively indicate the low and high points within which rates should evolve during the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0770	1.0811	1.1077	1.1234
EUR/GBP	0.8613	0.8690	0.8920	0.8990
EUR/CHF	0.9700	0.9720	1.0001	1.0103
EUR/CAD	1.4324	1.4500	1.4879	1.464
EUR/JPY	138.90	141.30	144.56	147.00

Announcements to follow

It's a calm week on the statistics front that is beginning. Unless there is a significant deviation from consensus, the consumer price index in the United States in March should come out stable at 6% year-over-year (first estimate). If this is the case, it should not greatly influence the Fed's short-term positioning. The Bank of Canada (BoC) is the only major central bank meeting this week. But there is nothing to expect. It is in pause mode. Finally, operators will keep an eye on the producer price index in the United States in March this Thursday. It is unlikely to be a market mover. However, it is an interesting statistic for economists because it gives an idea of inflationary pressures that could be passed on to consumers in the short term.

Below you will find the publications and events that should have a major impact on the evolution of currency rates.

Day	Time	Country	Indicator	What to expect?
On 12/04/2023	14:30	USA	Consumer price index (March)	The analyst consensus forecasts a figure of 6% annually (stable).
On 12/04/2023	16:00	CAN	Central bank meeting	No change in monetary policy.
On 12/04/2023	20:00	USA	FOMC meeting minutes	The issue is how the rate path is shaping up in an uncertain context for the financial sector.
On 13/04/2023	14:30	USA	Producer price index (March)	Previous: -0.1% month-over-month.