Black Sheep

In Europe, the macroeconomic situation remains complicated. Some thought that France might be the European black sheep of the 2020s due to its inability to reform. In reality, it's Germany. It was already known that the German manufacturing sector was struggling (collapse of industrial production, including in the chemical sector which was the strong point of the economy across the Rhine). Difficulties are increasing with the emergence of problems in the banking sector. The culprit: Pfandbriefbank (PBB) – a venerable small German bank, based in Munich, with a history dating back to Frederick the Great (18th century) and which has not gone bankrupt since 1901. It specializes in commercial real estate credit in Europe... and the United States. Problem: since Covid, commercial real estate is collapsing on both sides of the Atlantic. About 15% of PBB's portfolio, or 5.4 billion euros, is directly exposed to American commercial real estate, of which 80% concerns offices. Significant losses are expected, which could cause the bank's bankruptcy. This is what the market fears. For now, there is no risk of contagion. There might not be, anyway. But it highlights how Germany faces huge challenges, both in its manufacturing and banking and financial sectors. It's also a welcome reminder. Other players in commercial real estate are certainly going to suffer significant losses this year. Some will need to be bailed out. Others will have to sell at low prices. The good news is that things are stable in France. The universal banking model seems to be proving itself once again.

The macro point

The European Central Bank is making a big comeback this week. If you're hoping to learn more about the timing of interest rate cuts in the eurozone, you'll be disappointed. According to us, the institution will do everything to delay the first rate cut to give precedence to the U.S. Federal Reserve.

In Japan, the recent rise in inflation has rekindled the debate on a possible rate hike. The Consumer Price Index (CPI) rose by 2.2% year-on-year in January (compared to 1.9% expected by consensus). Excluding volatile items, core inflation reached 2.00%. This is an encouraging performance. However, we increasingly doubt that the Bank of Japan is truly willing to normalize its monetary policy. The money market is predicting a first rate hike next April. This is not guaranteed. Let's not forget that a weak yen (due to low interest rates) is a major support for the Japanese economy. At the end of last year, it was actually the only factor in growth. We keep in mind that the EUR/JPY pair may experience increased volatility in the coming weeks. But for now, buyers still have the upper hand (up 4.9% since the start of the year).

In China, something unusual is happening. The yuan's exchange rate has been on a declining trend in recent months but the Chinese central bank's balance sheet shows an increase in reserves. Generally, when the yuan decreases, reserves also do because the central bank intervenes (sells assets) to weaken its currency. Some experts believe it's not the central bank but rather Chinese commercial banks that are intervening directly in the foreign exchange market. This is likely. It has happened in the past, on orders from Beijing. In any case, we continue to anticipate a slow depreciation of the yuan in the coming months, which is necessary to restart the economic engine via exports. Attempts to develop domestic consumption capable of reducing dependence on exports have failed so far. Therefore, resorting to good old methods is necessary.

Technical point

On the foreign exchange market, implied volatility on the main currency pairs remains low. This has been the case for several months now. We do not think this will change immediately. There are no major trend changes to note. We are still positioned bearish on EUR/USD, bullish on EUR/JPY (due to the structural weakness of the Japanese yen), and neutral on EUR/GBP (range trading situation).

However, a small surprise from the Swiss National Bank (SNB). Data on deposit evolution at the central bank show that it intervened in the foreign exchange market to weaken the franc last January. This is probably still the case. But we don't have access to data to know for sure. The real effective exchange rate of the Swiss currency is still close to its record level. It's an uncomfortable situation for the central bank and the country's exporting companies, hence the necessity to lower the franc's exchange rate.

The supports and resistances shown below indicate the low and high points within which the prices should evolve during the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0678	1.0720	1.0945	1.1045
EUR/GBP	0.8301	0.8401	0.8656	0.8690
EUR/CHF	0.9333	0.9419	0.9609	0.9645
EUR/CAD	1.4401	1.4511	1.4833	1.4891
EUR/JPY	160.11	162.09	164.55	164.90

Announcements to follow

After a lull, central banks are back. The Bank of Canada will start things off. Move along, there's nothing to see here. That's how one could summarize the meeting's content. The currency market considers the probability of a rate cut to be only 30% (very unlikely). The monetary policy status quo should persist.
It's roughly the same scenario for the European Central Bank (ECB). Given the pronounced downturn in the eurozone, logic would dictate that the institution quickly lowers its rates to support the most struggling parts of the economy, such as real estate. But that won't happen. The ECB will likely wait patiently for the American Federal Reserve (Fed) to start the monetary easing cycle to do the same. In short, another monetary policy mistake to add to the ECB's record. It's not the first. During the global financial crisis, the ECB led by Jean-Claude Trichet raised its key rate due to possible price pressures linked to oil. Big mistake. Rates then had to be cut more than expected to help states and banks in difficulty. They say one never learns from their mistakes...

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

Day	Time	Country	Indicator	What to Expect?
05/03/2024	16:00	USA	Non-Manufacturing ISM (February)	Previous at 53.4.
06/03/2024	14:15	USA	ADP Employment Survey (February)	Previous at 107k.
06/03/2024	15:45	CAN	Central Bank Meeting	No change.
07/03/2024	14:15	EUR	Central Bank Meeting	No change.
08/03/2024	11:00	USA	Labor Department Employment Report (February)	Previous 353k (likely to be revised downward).

The information presented in this publication is provided purely for informational purposes and does not constitute investment advice, a sales offer, or a solicitation to buy, and should not under any circumstances serve as a basis or be taken into account as an incentive to engage in any investment.