Populism and Central Bank

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The macro point

Last week was shortened due to Thanksgiving. Unsurprisingly, the main currency pairs were stagnant. We expect a bit more movement in the coming sessions, particularly because eurozone inflation for November will be released. We doubt this will change the direction of the ECB's monetary policy. But it is still an important statistic that should, in our view, confirm the ongoing disinflation process. Populism is making a comeback. And it will likely be even worse next year. In Argentina, the unconventional candidate Javier Milei won the presidential election, definitively ending Peronism – this political movement born in the 1950s. At that time, Argentina was among the major economic powers. To say the least, Peronism did not serve it well. Argentina oscillates between the 71st and 73rd position of world economies today. It's a failure. In France, there is often talk of decline. Argentina is, unfortunately, a good example in this respect. Milei plans to overturn the table: elimination of several ministries, the central bank, and dollarization of the economy. If this dollarization policy is implemented, the country will no longer be able to mint currency and will lose control over its economy. This is generally a risky choice. But, at the same time, the Argentine peso already has no real value due to the total loss of confidence in this currency by the population. Milei is somewhat of a preview of what awaits us in 2024. Political risk should be high, particularly due to the intense election cycle in emerging countries (in India, for example). But also because the American presidential election is looming. For now, the currency market is not really reacting. Attention is focused on the start of the rate cut cycle by central banks. All market operators are making their predictions. At the money market level, the first rate cut by the US central bank is expected in May (no change from last week). For the European Central Bank (ECB), it is in June 2024. However, this is by no means certain. Several key members of the Governing Council (which is responsible for rate policy in the euro area) have suggested that market expectations are somewhat misguided and that the next rate cuts, when they occur, will happen later than expected. We think that politics could quickly take precedence over central banks as the main focus for currency traders. And we even know when this could occur. The candidate selection process for the Democratic and Republican parties for the US presidential election begins on January 15th, with the Iowa Caucus. If Donald Trump comes out on top, which is likely according to recent polls, investors will again closely examine his economic program. Last week, we mentioned the main lines of his return to protectionism program. It also includes bizarre measures like a decree firing thousands of uncooperative federal government employees (unlikely to be feasible) and the construction of ten "freedom cities" the size of Washington where "you will go to the office in a flying car." This is the mobility aspect of his program. Here again, it is unlikely to be feasible within four years (the duration of a presidential term). In any case, one can fear that the closer we get to the November 2024 election, the more investors will worry about the state of US democracy and economy in the event of a Trump victory. At a minimum, this will lead to increased volatility in financial assets and certainly a retreat into safe values (it is too early, in our opinion, to know if the US dollar will benefit from this). We should expect that the year 2024 will be very eventful in the currency market.

Technical point

The forex market experienced a lateral development last week due to Thanksgiving festivities that reduced trading volumes on Forex. Not only equity markets were impacted. Based on the real effective exchange rate, which measures whether a currency is overvalued or undervalued relative to another, the euro and the British pound are among the most overvalued major currencies. Conversely, the Japanese yen (unsurprisingly) and the Norwegian krone are the most undervalued. This does not automatically mean that there will be a rebound in the yen's exchange rate, for example. But if one seeks to position for long-term buy or sell on a currency, it is always interesting to know this important parameter in decision-making. In the short term, the EUR/USD remains in a range situation, around 1.09. The absence of first-order economic news explains this apparent stability. We still consider that the medium-term downside potential is intact. The euro is too expensive relative to the fundamentals of the eurozone. The supports and resistances displayed below respectively indicate the lows and highs within which prices should move over the course of the week.

Announcements to follow

Once again, inflation will be the main focus this week with the release of the consumer price index in the eurozone for November. This is the first estimate. We expect the publication to confirm that the disinflation process is underway. No impact on the ECB, which has reached the terminal rate, according to us. Finally, normally we do not closely watch consumer confidence across the Atlantic. But following the decline in retail sales, we have some concerns about American households. This publication will allow us to know if we need to worry more or not. No notable effect is expected on USD pairs, however. Below are the publications and events that should have a major impact on currency course developments.

Day	Time	Country	Indicator	What to expect?
11/28/2023	16:00	USA	Conference Board Consumer Confidence (November)	Previous at 102.6.
11/30/2023	11:00	EUR	Consumer Price Index (November)	Previous at 2.9% year-on-year change.
11/30/2023	14:30	USA	Consumer Price Index - Core PCE (October)	Previous at 3.7% year-on-year change and 0.3% monthly change.