Chinese Surprise

The macro point

Central banks were the other major topic of the past week. Unsurprisingly, the gap between the two sides of the Atlantic is widening. The European Central Bank (ECB) lowered its main interest rate by 25 basis points. This was not much help for the euro. Everything was already priced in. Facing economic stagnation and disappointing wage increases, the ECB has no choice but to support the economy through the lever of key interest rates, even if it is quite ineffective. In contrast, the US Federal Reserve (Fed) has chosen to pause its rate-cutting cycle. This was not a foregone conclusion. The objective is to study the macroeconomic impact of the new US trade policy. From our point of view, this pause is temporary. It is, however, certain that US rates will remain durably higher (higher for longer) than in the eurozone. We estimate that the US neutral rate is likely between 3.5%-4.0% while it is certainly close to 2% on this side of the Atlantic. Practically, this means that for an investor, it is more advantageous to place money in US money market funds than in European money market funds, for example. Logically, capital flows into US bonds will tend to favor a strong dollar in the long term.

Technical point

On the foreign exchange market, the week was mainly stirred by minor currencies. The Russian ruble reached a high point since early November 2024 against the US dollar. Is this a sign of improving conditions in Russia? Not really. The ruble, like its Chinese counterpart, is a currency partially managed by the Russian central bank. The Russian economic situation remains very complicated.

No major change in the EUR/USD level given the lack of surprise from central banks. We estimate that the pair will struggle to break the 1.06 mark in the short term.

Finally, the pair to watch this year is probably the EUR/CHF. Given the stagnation of growth in the euro zone and persistent budgetary concerns, the euro should remain weak, positioning the CHF as a "safe haven". As inflation in the euro zone decreases, the ECB should further reduce its interest rates, which will likely prompt the Swiss National Bank (SNB) to lower its rates to avoid an excessive appreciation of the CHF. We might see a return to negative rates in the Swiss Confederation – a hypothesis that might have seemed absurd just a few months ago.

Announcements to follow

This week, focus will be on US employment and central banks – with a 25 basis point rate cut expected by the Bank of England (already priced into the pound sterling). As far as the US labor market is concerned, some signs of weakness are visible. Fortunately, nothing worrying at this stage.

Across the Atlantic, the average duration of unemployment reached twenty-four weeks in December - the highest level in nearly three years. Over the past two years, the average duration of unemployment has increased by five weeks. Moreover, the time it takes for Americans to find a new job is now longer than at any time before the financial crisis of 2008. These data coincide with the drop in new job offers on Indeed over the past three years, to a level close to their lowest since the 2020 pandemic. American companies are more cautious. Logically, they are reducing hiring. It is certain that the Fed – which paused its monetary policy last week – will look closely at the data from January.

The information presented in this publication is communicated for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be used as a basis or considered as an inducement to engage in any investment.