Surprise, surprise!

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The macro point

One should always avoid having certainties when dealing on financial markets. The consensus widely expects that the US Federal Reserve (Fed) will keep its key interest rate unchanged this week. This is by no means certain. Recent surprise rate hikes by the central banks of Canada and Australia show that nothing is guaranteed. From our point of view, a rate hike by the Fed is entirely possible this Wednesday. In this period of high inflation, a pause in monetary policy is not meant to last long. This is what the central banks of Australia and Canada reminded us last week. Contrary to market expectations, they both raised their key interest rates. In Australia, the strong wage growth (+8% over a year) was a decisive factor in the decision to tighten the cost of money. In Canada, the renewed rise in real estate prices partly motivated a 0.25 percentage point increase in the main policy rate. Before Covid, monetary policy was perfectly predictable (the "era of forward guidance"). This is no longer the case. This is mainly due to the difficulty in predicting the trajectory of inflation beyond a three-month period. Central banks proceed cautiously. They are forced to adjust their monetary policy on a case-by-case basis, depending on the economic data published. It is said that they are "data-dependent." The consequence of this is that there can be abrupt movements in currencies from time to time, even though implicit volatility in Forex remains generally contained. Many traders expect the US Federal Reserve (Fed) not to change its rate policy this week (pause). Let’s keep in mind the surprise actions of the central banks of Canada and Australia. We will return to this in a moment. On the macroeconomic front, bad news is accumulating in China. Exactly six months ago, the market consensus anticipated a massive Chinese economic rebound that would spread to the global economy and fuel a commodity boom (which, in theory, would have been beneficial for the Australian dollar and the Canadian dollar). This is not the case. Commodities are collapsing. China is faltering. The latest statistics show that the Chinese macroeconomy is certainly more troubled than the consensus initially thought. The May trade balance figures are disastrous. Measured in dollars, China's exports fell by 7.5% year-on-year in May (compared to an expected drop of only 1.8%). Imports, which provide insight into how the Chinese consumer is doing, are also in sharp decline, around 4.5% year-on-year. This is slightly less worse than expected (a drop of 8%). But it is still worrying. Exports have also fallen with all of China's major trading partners, including the United States, Japan, and Southeast Asia. A point of detail: trade relations with Russia are intensifying at an impressive pace (+40.7% of exchanges in the first five months of the year). China's imports from Russia, for example, jumped by 75% over the same period. This is the direct consequence of the war in Ukraine and the subsequent economic isolation of Russia. Faced with persistent economic difficulties, China is certainly going to announce new support measures but these should have a noticeable effect on the economy only by the end of 2023. The official Chinese press mentions measures aimed at real estate (especially in the country’s main cities) and a reduction by public banks of 5 to 10 basis points in interest rates to particularly stimulate investment. A reduction in the banks' reserve requirement ratio, which has been discussed since the beginning of the year, is only expected during the second half of the year. This is usually a very effective measure to inject a large amount of liquidity into the economic system. What is certain is that the Chinese economic difficulties will likely lead to a significant global economic slowdown starting this summer. As the proverb says, in every misfortune, there is good. The decline in economic activity leads to a significant drop in international transport costs. According to data published by the Baltic Airfreight Index, the decrease in the average air freight rate between Hong Kong and Europe over a year is 41%. This is massive. It is an important disinflationary factor (even though it unfortunately mostly reflects a slump in global demand).

Technical point

On the foreign exchange market, EUR/CAD has surprisingly barely moved following the Bank of Canada's surprise decision. The short-term trend remains bearish as long as the pair does not break through the resistance zone at 1.4490. Regarding EUR/USD, we observe stabilization of the pair around 1.06-1.07 in the short term. Be cautious, significant price shifts are likely next week due to the Fed meeting. Moreover, central bank interventions in the foreign exchange market continue, even if they draw less attention than usual. Thus, the Bank of South Korea announced a significant drop in its foreign exchange reserves last week – reflecting direct market interventions to support the won. Other Asian countries act in a similar way. The support and resistance levels displayed below indicate the low and high points within which prices should evolve during the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0490	1.0630	1.0890	1.1020
EUR/GBP	0.8500	0.8522	0.8730	0.8890
EUR/CHF	0.9515	0.9602	0.9878	1.0040
EUR/CAD	1.4201	1.4230	1.4490	1.4670
EUR/JPY	146.39	147.90	151.66	152.99

Announcements to follow

The European Central Bank (ECB) meeting is not this week's main focus. Let's be clear, the ECB will raise its key interest rate by 25 basis points. This is already factored into market expectations. However, uncertainty remains regarding the central bank's stance in July. But that is a distant horizon. In the short term, forex traders are particularly curious about the outcome of the Fed’s meeting this Wednesday. Following several FOMC members' statements and the latest employment report confirming a decrease in wage pressures, the market now prices a pause at nearly 75%. This is not certain at all. In fact, it will all depend on what the FOMC focuses on. If its members concentrate on the slowing leading indicators confirming recession risk, they will favor a monetary policy pause. Conversely, if they prioritize "lagging" indicators, they will be tempted to raise rates again to definitively eliminate the risk of price rebounds. In any case, the choice is difficult for the Fed. On the forex traders' side, a scenario different from the consensus (which anticipates a pause) could generate a sharp corrective movement on currencies (and other financial assets). Hence the importance of having a good hedging strategy in place before the FOMC. Our teams are available to discuss with you to find the most appropriate setup. Below you will find publications and events expected to have a major impact on currency movements.

Day	Time	Country	Indicator	What to expect?
13/06/2023	11:00	DEU	ZEW Economic Sentiment Index (June)	Previous at -10.7.
13/06/2023	14:30	USA	Consumer Price Index (May)	Previous at 4.9% year-on-year.
14/06/2023	14:30	USA	Producer Price Index (May)	Previous at 0.2% month-on-month.
14/06/2023	20:00	USA	Central bank meeting	The market consensus predicts a monetary policy pause. Beware, a surprise cannot be ruled out.
15/06/2023	14:15	EUR	Central bank meeting	Likely new key interest rate increase by 25 basis points.
15/06/2023	14:30	USA	Philadelphia Fed Manufacturing Index (June)	Previous at -10.4.