STAGFLATION The information presented in this publication is provided solely for informational purposes and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not in any way serve as a basis or be considered as an inducement to engage in any investment. The macro point Back-to-school season is difficult. We have entered a world of a persistently strong dollar due to economic deterioration. The movement is very noticeable against the euro but also against the yen and yuan. In the short term, the bearish bias on the EUR/USD could thus persist. We do not rule out central bank interventions to support the yen and/or yuan, which means we could experience erratic movements in these two currencies. If you are exposed, consider reviewing your foreign exchange hedging strategy. Stagflation is the term to keep in mind at the end of 2023. The scenario of sluggish growth (with a risk of recession) coupled with persistently high inflation (above 2%) is increasingly mentioned by economic experts. It must be said that the latest statistics published everywhere are concerning. Europe is the region facing the most complex situation. The final estimate of the PMI activity indicators in the euro zone for August is much worse than the initial estimate, which itself was worse than expected and worse than the July estimate. The figures are at a low point not seen since November 2020 (during the Covid lockdown). In other words, it is hard to see how the euro zone could escape a technical recession (two consecutive quarters of GDP contraction) with such a slowdown in services and the manufacturing sector. Europe (including the United Kingdom) is certainly the region facing the highest risk of stagflation. On the other side of the globe, the indicators are just as bad. In China, most statistics are much lower than in 2019. It seems that China's economic power has peaked. It might be the end of an economic miracle that lasted almost 30 years (1994 was the turning point in China's economic model). This has two immediate consequences. First, China will not be a growth driver for the global economy, contrary to what has been the case for about 10 years. This is especially bad news for Europe, which has increased its dependence on China since Covid. Secondly, the hypothesis that China will surpass the U.S. economy in the short term is no longer mentioned. According to Bloomberg, this should not occur until 2040 (at best) and will be short-lived. The Chinese economy seems to be facing a scenario feared by many economists: it has reached its economic peak before becoming fully developed. This is partly due to unfavorable demographic trends (a long-term factor). It is also related to the accumulation of debt in non-productive sectors after it opened wide the credit taps in 2009 to avoid a recession (a short- and medium-term factor). According to an increasing number of economists, it can now be considered that China is in recession (by Chinese standards, of course). The ongoing global economic slowdown has consequences for monetary policy. Unsurprisingly, more and more countries are deciding to ease their monetary policy (even when the fight against inflation has not been completely won) to support economic growth. Last week, Chile again cut its key rate by 75 basis points (a massive cut) to 9.50%. Poland followed suit with a surprise 75 basis point cut. Analysts expected the Polish central bank to pause at least until the end of the year before lowering its rates. The prospect of rate cuts is also becoming clearer in developed countries. Canada and Australia decided to pause monetary policy during their meeting last week. Although the possibility of rate cuts has not yet been officially mentioned, everyone is thinking about it. In Australia's case, it is certainly more urgent than elsewhere due to the worrying evolution of the housing bubble. Following the extension of the monetary policy pause in Australia, the AUD collapsed against its main counterparts. This shows that uncertainty about the future of interest rate policy is reactivating volatility in the foreign exchange market. We expect currencies to experience erratic movements in the coming weeks as economic deterioration worsens. Technical point There is, however, one global economy that is an exception, the United States. There is no recession in sight. And everything suggests that economic growth will be better than expected this year, barring any fourth-quarter mishaps. The direct consequence of all this is that investors retreat to the US dollar. The greenback is the preferred currency of the moment and shows the best monthly performance among G10 economies (the top ten global economies). The rise of the dollar is obviously noticeable against the euro (which hit a three-month low last week in the wake of eurozone PMI activity indicators). It's also visible against emerging market currencies. They have experienced a sharp decline that will pose serious macroeconomic problems. Indeed, their weakness makes USD borrowings more expensive, which causes imported inflation and reduces the performance of local currency assets. It also increases the risk of direct exchange rate interventions by some countries (increasing volatility as a result). China and Japan are certainly the two economies most likely to intervene on the FX front in the short term. Therefore, be very vigilant if you have exposure to CNH and/or JPY in the coming weeks. The support and resistance levels displayed below indicate the lows and highs within which the prices should move during the week. Announcements to follow As we have indicated, monetary policy is less predictable than it was two months ago due to the sharp decline in economic activity over the summer. Given the obvious risk of a recession in the eurozone, one can legitimately question the opportunity for a further rate cut by the European Central Bank (ECB) this week. The money market estimates that there is only a 40% chance for the ECB to increase its key rate again (a very low level!). On our part, we believe the probability is closer to 60%. If the ECB wishes to maintain a hawkish tone (as was the case lately), it would be more logical to increase the cost of money than to pause. A rate hike is more credible. However, it is likely to be the last of the economic cycle. We expect a resurgence of volatility in EUR pairs. The ECB press conference on Thursday will, as always, be the main point of focus for market operators (with likely erratic movements in the euro). Below are the publications and events that should have a major impact on currency price movements.DayTimeCountryIndicatorWhat to expect?09/13/202314:30USAConsumer Price Index (August)Previous at 3.2% year-over-year and 0.2% month-over-month.09/14/202314:15EURCentral Bank meetingPrevious at 1.5%. It's not 100% guaranteed, but a final rate hike is likely to be announced.09/14/202314:30USAProducer Price Index (August)Previous at 0.3% (month-over-month).