A Tough Time

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The macro point

China is concerned, and when China raises concerns globally, it is often beneficial for the US dollar. That's exactly what happened last week in the foreign exchange market. Traders increased their net long positions on the US currency, pushing the EUR/USD pair towards the lows seen two months ago. In the short term, the trend is bearish for the pair. Generally, it’s better to see the glass as half full than half empty. Sometimes, it’s impossible. There was literally only bad news on the economic front last week. The year 2023 was expected to be rather dull economically, without too many risks, mainly thanks to a strong Chinese recovery. No such luck, the much-anticipated Chinese recovery is sluggish. According to May's PMI data, activity in the manufacturing sector—one of China's economic lungs—is still in contraction and has even returned to its December 2022 level when China was still applying the zero-Covid policy. Even though expansion is still happening, activity is also slowing in the services and construction sectors. This led to a downward adjustment in commodity prices and partly explains the poor performance of some currencies strongly linked to commodities, such as the Canadian and Australian dollars, in recent weeks. Analysts, who have already been wrong once, now expect China's economic recovery to pick up after the summer. It would be logical. But it is far from certain. At this stage, it is increasingly evident that the Chinese economic relay will not be one this year. With a global tightening of financial conditions, demand starting to weaken significantly worldwide, and shrinking fiscal room (rating agencies have downgraded the sovereign ratings of several countries in recent months), it's now clear that the economic slowdown will be pronounced in the short term, as we mentioned in our weekly update last week. In France, the situation is also deteriorating. For a long time, household consumption resisted despite high inflation. That is no longer the case. Recent INSEE figures show that food consumption in volume (which can be considered as essential goods) has returned to its 2004 levels! In concrete terms, households are consuming less and even depriving themselves of food. This is paralleled by another statistic that emerged last week: one-third of French people have 100 euros left by the 10th of the month, mainly due to high inflation. This is obviously not a uniquely French phenomenon. All European countries, without exception, are affected by this issue. Because of high and partly structural inflation (in public debate, it is beginning to be half-admitted that inflation will never return to the 2% target level), a large part of the European population faces the risk of lasting impoverishment. In many European countries, the middle class has been significantly reduced over the past fifteen years. Due to inflation, this proportion will further decrease. Inflation, which was primarily an economic problem until now, risks becoming a serious social issue. It is obvious that central bankers are aware of this. That's why the European Central Bank (ECB) has repeatedly stated in recent weeks that the rate-tightening cycle is not yet complete. Our sentiment: if we want to fight inflation, it will certainly be necessary to increase real rates much more into positive territory than before. This is not at all factored into the foreign exchange market. Finally, American statistics are also mediocre. They confirm that the risk of a recession is increasing (but this does not mean it is already here, as many analysts suggest). The PMI activity index for the Chicago region collapsed in May to 40.4 from 48.6 in April. All sub-components (production, new orders, employment, etc.) are in free fall. The only good news is that prices have increased at a slightly slower pace. This is normal. If demand slows down, prices rise less or even decrease.

Technical point

In the foreign exchange market, the euro remains weak, but this reflects more a generalized strengthening of the US dollar than anything else. European macroeconomics is not very good (particularly in Germany). But there hasn't been anything very new in recent sessions that could justify renewed selling pressure on the euro. In fact, concerns about China have been the main driver of Forex developments. Unsurprisingly, this resulted in a drop in CNH/CNY and a rise in the dollar. The greenback has taken on its traditional role as a safe haven. We estimate that the EUR/USD could continue to fall in the short term, with a price target around 1.0573 (main support for the pair). The EUR/GBP is also in a similar dynamic (a decrease of nearly 1.3% in five sessions). We are targeting a return to the 0.8500-8511 area. Finally, for the EUR/JPY, recent sessions haven't been very positive, but the underlying trend remains upward. The monetary policy differential between the Bank of Japan and the ECB, which isn't going to fade anytime soon, is the main marker of the pair. The supports and resistances shown below respectively indicate the lows and highs within which prices should evolve over the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0490	1.0573	1.0830	1.0989
EUR/GBP	0.8439	0.8511	0.8739	0.8934
EUR/CHF	0.9489	0.9590	0.9902	1.0040
EUR/CAD	1.4203	1.4320	1.4760	1.4802
EUR/JPY	145.90	147.80	151.90	152.12

Announcements to follow

It’s a very quiet week from a statistics point of view that begins. The Bank of Canada (BoC) is the only central bank meeting on the agenda. We do not anticipate a rate hike on this occasion (this is in line with consensus). However, it is likely that the BoC has not finished with monetary tightening. Inflation remains a headache (particularly in food and real estate). At least one new 25 basis point hike is therefore likely before the fall. The BoC is fortunate that the economy is doing rather well, as evidenced by GDP figures in the first quarter, which allows it to focus solely on fighting inflation. All other central banks cannot say the same. In the long term, this could benefit the Canadian dollar, provided that commodity prices rise again (which is not yet the case). Below are the publications and events expected to have a major impact on currency movements.

Day	Hour	Country	Indicator	What to expect?
06/05/2023	16:00	EUR	Non-manufacturing ISM (May)	Consensus at 51.8 (in expansion phase).
06/07/2023	16:00	CAN	Central bank meeting	No change in monetary policy.
06/08/2023	01:50	JAP	Q1 GDP	Probable confirmation that the Japanese archipelago has exited recession.