Hammer Blow

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The macro point

Waking up is hard this Monday. The International Monetary Fund (IMF) has confirmed what we already suspected: the global economy is on the brink of recession. According to the international organization, an unprecedented accumulation of risk factors (prolonged inflation, supply chain disruptions, more restrictive monetary policies, significant drop in demand, etc.) will push at least a third of countries into a recession phase. For now, France is expected to avoid this scenario (although several renowned banks like Citigroup predict a recession for the country next year). The IMF estimates that French growth in 2023 should be 0.7% (compared to an official government forecast of 1%). Obviously, this forecast will be revised as economic data emerges. In view of activity indicators for the manufacturing and services sectors (PMI indicators) and confidence indicators (particularly business climate), we strongly doubt that France will be able to avoid a recession, especially knowing that its main trading partner, Germany, has likely already entered this negative spiral. For businesses, this implies adapting to this new situation and considering foreign exchange coverage as a means to reduce potential costs (if the subject is relevant, of course). French businesses showed incredible agility during the Covid crisis. The generous public aid that put the economy under a shelter was obviously beneficial. We can only hope that the 'whatever it takes' approach will continue (even if it poses a certain problem in terms of accumulating public debt in the medium to long term). Unfortunately, there is no relief on the inflation front. The harmonized consumer price index (which allows comparisons between European countries) hit a new record of 10.9% year-on-year in September in Germany. Economists predict the inflation peak should be around 12-13% across the Rhine. It's painful. In the United States, inflation remains volatile. The producer price index reached 8.5% year-on-year in September (against a consensus of 8.4%). On the consumer side, inflation also increased more than consensus expected, to 8.2% year-on-year for the same month. The main categories of increase are energy (+19.8%), food (+11.2%), and transport, vehicles, and medical devices (+6.6%). These figures validate the scenario of a 75 basis point increase in the Federal Reserve's (Fed) key rate next month. There is no choice but to continue the process of tightening financial conditions. Unlike other countries, the United States should avoid recession next year. This is a definite advantage from a monetary policy perspective. It offers the Fed a larger window of opportunity to raise rates as needed to bring inflation back to more sustainable levels (probably not a return to the original 2% target but rather around 4%). Finally, the energy crisis remains a headache for Europeans. Concerns about electricity supplies during the winter persist. It is, evidently, an inflationary factor. For example, there is a 200 euro per MWh gap between the spot price and the three-month forward price of electricity for France (in the French case, this is partially explained by structural issues faced by half of our nuclear fleet). At Mondial Change, we are convinced that the American economy will fare much better than the European economy in the coming months. This is a fundamental factor that should continue to support the US dollar. Moreover, looking closely at capital flows, we note a massive outflow from Europe and emerging countries (in unusually large proportions in India) which are being redirected to the US market. This phenomenon is likely to intensify once the recession in the eurozone has been officially recognized (probably in the first quarter of next year). During periods of severe crisis, investors always react the same way: they seek refuge in the most liquid market in the world, which is the United States. This happened in 2000 (internet crisis), in 2007-08 (subprime crisis), in 2012 (European sovereign debt crisis). It will also be the case in 2023. In the currency market, the euro has made a technical rebound against its main counterparts (with the notable exception of the British pound) over the last five sessions. However, in most cases, we do not observe a medium-term trend reversal. Technical indicators are still falling on the EUR/USD (with a price target around 0.95-0.9550 initially). The trend also remains downward against the EUR/CHF (with a short-term target at 0.9584). It is normal that after a long period of depreciation, the euro rebounds a bit. However, there is nothing to be optimistic about for the single currency in the weeks and months to come. The only major currency against which the euro might hold its own is against the British pound in our view. The British currency has regained some ground and returned to the price zone of early September (around 0.86-0.87). But the bearish pressure remains intact. The difficulties of the British economy are enormous. It is obvious that this will be rather positive for the EUR/GBP. We have a short-term target of 0.88. The supports and resistances shown below respectively indicate the low and high points within which rates are expected to fluctuate during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	0.9370	0.9547	0.9903	1.0080
EUR/GBP	0.8190	0.8448	0.8804	0.8964
EUR/CHF	0.9437	0.9584	0.9879	1.0025
EUR/CAD	1.2999	1.3201	1.3606	1.3808
EUR/JPY	139.51	141.45	145.18	146.55

This week will still be dominated by inflation. The consumer price index will be published both in the eurozone and the United Kingdom for September. For the eurozone, this is the second estimate. It should be in line with the first (inflation at 10% year-on-year). However, it is a first estimate for the United Kingdom. It may be bad news. According to economists' consensus, inflation is expected to exceed the symbolic 10% threshold to reach 10.2%. It will certainly be a blow to the British pound. We anticipate an intensification of the downward pressure on the British currency. Given the high degree of uncertainty regarding the United Kingdom's economic and financial trajectory, we advise staying as far away as possible from British assets. In the event of exposure to the currency, it is recommended to adopt an appropriate hedging strategy. Volatility on GBP pairs should remain high through the end of the year. You will find below the publications and events expected to have a major impact on the currency exchange rates.

DAY	HOUR	INDICATOR	WHAT TO EXPECT?
18/10	11:00	ZEW Economic Sentiment Index (October)	Still deep in the hole, at -60.0 against -61.9.
19/10	08:00	Consumer Price Index (September)	Expected increase to 10.2% year-on-year against 9.9% previously. As expected, inflation exceeds the symbolic 10% threshold.
	14:30	Consumer Price Index (September)	New estimate. No change expected (10% year-on-year).
20/10	14:30	Philadelphia Fed Manufacturing Index (October)	The index is expected at -4.5 against -9.9 in September.