From Bad to Worse

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The macro point

Last week, several central banks took emergency action in the foreign exchange market to curb the fall of their currency against the American dollar. The Indian central bank repurchased large quantities of rupees over several sessions. The Bank of Japan (BoJ) continues its policy of supporting the yen. For now, traders seem reluctant to speculate against the Japanese currency. The USD/JPY pair remains close to the 145 mark – the price zone set by the BoJ. Still in Asia, the Chinese central bank raised its voice to counter the depreciation of the yuan. Initially, it emphasized the importance of a stable exchange rate for the yuan and urged Chinese state banks to do more in this regard (known as verbal intervention). This was not enough. In a second phase (starting last Thursday), it intervened more aggressively by repurchasing yuans and selling dollars on the market (presumably through state banks). This helped support the exchange rate of the Chinese currency.

Not all interventions are successful, though. Across the Channel, the British pound remains weak against the American dollar (and is significantly depreciated against the euro). After holding back for several days, the Bank of England (BoE) was forced to intervene urgently last Wednesday and launched an exceptional quantitative easing program to mitigate speculation on UK sovereign bonds. On Wednesday morning, just before the announcement, several traders noted a level of tension in the UK credit market reminiscent of what happened in 2008 during the collapse of Lehman Brothers (this triggered a severe financial crisis afterward and indirectly the sovereign debt crisis in the eurozone). The British pound temporarily bounced back against the American dollar immediately following the BoE's announcement. But it was short-lived (lasting only a few hours). The British currency still appears troubled due to concerns about the increase in UK public debt resulting from the mini-crisis budget presented by Prime Minister Liz Truss's government. Further spikes in tension on the British pound in the short term cannot be ruled out. What is certain is that volatility will remain high in the coming weeks. In the worst-case scenario, we could see the EUR/GBP pair reach parity. At the beginning of September, this was unimaginable.

To make matters worse, the energy situation continues to deteriorate in Europe. Nord Stream 1 and Nord Stream 2, which supply gas to Europe from Russia, were subjected to acts of sabotage. For Nord Stream 2, it's not really a problem since the pipeline was never operational (due to the war in Ukraine). However, Nord Stream 1 remains an important gas distribution channel for several European countries. Consequently, gas prices made a double-digit rebound. This will affect inflation in September (to be published in October). It is expected that disruptions in the gas pipelines connecting Europe to Russia will be common this winter. For Europe, importing liquefied natural gas is the only solution. The problem is that it's expensive and will increase the energy bill (especially in European countries where there isn't a protective tariff shield as in France).

At least, there is one thing that doesn't change in this rapidly changing world: the positioning of the American Federal Reserve (Fed). Several members of the FOMC (the body that determines US monetary policy), including Neel Kashari, James Bullard, and Charles Evans, have spoken in recent days. They unanimously advocated for continued monetary tightening to combat inflation. Even if the inflation peak in the United States has likely passed, financial conditions need to be tightened further to quickly return to more tolerable price increase levels (realistically, this probably doesn't mean returning to the 2% target soon but rather around 4-5% inflation). The 'hawkish' tone (in favor of continuous rate increases) of all FOMC members is a definite support for the American dollar.

In the foreign exchange market, the euro has suffered from the setbacks of the British pound. In a panic move, the single currency collapsed below 0.96 against the American dollar at the beginning of last week. Subsequently, the EUR/USD made a rebound towards 0.99, but it didn’t last long, unsurprisingly. The fundamental trend remains bearish on the pair due to the numerous risks we discuss weekly (recession, energy crisis, etc.). The first level to watch is at 0.9619 (support zone). We estimate that a break of the 0.95 barrier could potentially lead the pair towards 0.92. Currently, no factor allows for hope of a trend reversal on the pair (despite the fact that the euro is clearly undervalued compared to the eurozone's economic fundamentals). The prolonged weakening phase of the euro is set to continue.

The supports and resistances displayed below indicate the lows and highs within which prices should evolve during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	0.9423	0.9619	1.0040	1.0348
EUR/GBP	0.8443	0.8635	0.9457	0.9710
EUR/CHF	0.9147	0.9334	0.9710	0.9898
EUR/CAD	1.2843	1.3146	1.3756	1.4213
EUR/JPY	135.03	138.69	143.65	145.44

The macroeconomy will be in the background this week. US employment figures (Wednesday and Friday) are important but should be in line with expectations. Employment is a lagging indicator compared to the economic cycle. In other words, employers adjust their hiring perspectives with some delay compared to the situation. In the current context, where we're trying to determine if the USA will enter a recession or not, the figures expected this week don't help us much. However, it's evident that the communication from central banks and potential interventions in the foreign exchange market need to be closely monitored. The American dollar remains too high compared to almost all currencies. We have sometimes reached breaking points. Central banks have no choice but to intervene. This will lead to increased volatility and potentially cause erratic movements in currencies. The British pound is in the weakest position. If exposed to this currency, consider adjusting your hedging strategy. Otherwise, you may face unpleasant surprises.

Below, you will find publications and events likely to have a major impact on currency trends.

DAY	TIME	INDICATOR	EXPECTATION
10/03	16:00	ISM Non-Manufacturing Index (September)	Stable at 52.8 (in expansion territory).
10/04	16:00	JOLTS Job Openings Report (August)	Decrease to 10.450M. The US job market remains very dynamic and is in no way in recession.
10/05	14:15	ADP Non-Farm Employment Change (September)	Previous at 132k. The calculation methodology recently changed. But it's still not a good leading indicator to anticipate NFP report trends.
10/07	14:30	Employment Report – NFP (September)	The unemployment rate is expected to remain stable at 3.7% of the active population, with job creation declining on a monthly basis to 250k against 315k in August (figure subject to revision).