The Good and the Bad 3

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The macro point

The economic signals are mixed at the moment. This is normal during a transition period towards a new growth regime (specifically, we are moving from a phase of strong post-Covid economic rebound to a sharp slowdown in growth or even a recession in several economies). The American indicators published last week confirm the thesis of economic slowdown. The figures for construction, activity in the manufacturing sector, and the labor market (JOLTS report on new job offers) were all poor. Fortunately, there is also some good news. According to the ADP report, wage growth is slowing for people changing jobs. This is rather positive. The wage-price loop must be stopped in the United States to return to more manageable inflation levels for businesses and households. This is the only way to alleviate the pressure on the economy resulting from the pandemic, which has created enormous imbalances everywhere. The easing of upward pressure on wages was also noticeable in the ISM report on activity in the non-manufacturing sector for the month of September. Contrary to some analysts, we still consider that the risk of the American economy entering a recession is limited at this stage. On the other hand, the latest PMI activity indicators for services and the manufacturing sector for the month of September seem to indicate that the eurozone has already entered a recession in the third quarter. The growing economic gap on both sides of the Atlantic partly explains the weakness of the euro against the US dollar in recent months. New central banks continued to tighten their monetary policy last week. The central bank of New Zealand increased its main interest rate by 50 basis points to 3.50%, as expected by the analysts' consensus. In contrast, the Reserve Bank of Australia surprised. In recent months, it had opted for more substantial increases (at least 50 basis points) to address inflationary pressures. This time, it decided to raise its key interest rate by only 25 basis points, to 2.60%. The reason given: the economic slowdown (which already translates into a significant decline in household spending and a deflation of real estate prices) risks derailing growth. It is the first central bank of a major developed country to pivot its monetary policy, as they say in economic jargon. This means that it should soon stop its monetary normalization policy (via rate hikes) to consider the ongoing slowdown in activity. In the medium term, this opens the door to interest rate cuts (perhaps from mid-2023). It is not impossible that other central banks stop their rate hike process sooner than expected due to economic declines. We particularly think this could be the case for the Bank of England (BoE) given the obvious risk of long and deep recession. As a reminder, the BoE anticipates a recession as severe as the one at the beginning of the 1990s but lasting longer (five quarters), starting in the fourth quarter of this year. This partly explains the depreciation of the British pound in recent months against the US dollar (a 16% decrease since January 1st) and against the euro (a decrease of just over 4% over the same period). Given the economic context, we consider that the US dollar will continue to be the major currency showing the strongest performance in the coming months. The dollar is obviously very overvalued, but we are not at all at the levels of overvaluation reached in 1985 (which led to coordinated intervention by global central banks to lower the exchange rate). Many analysts anticipate that the peak of the dollar is near. It's possible. But it is important to keep in mind that the ebb of the dollar after a cycle of strong progression generally takes several years (two to three years based on historical data). In other words, the strong dollar will continue to be a serious problem for quite some time. It must become accustomed to it. On the foreign exchange market, the British pound was in the spotlight last week. The British currency made a small recovery against its main counterparts (the EUR/GBP pair returned to the area around 0.87, which dominated part of the summer) following the decision of the UK government to reverse one of the main fiscal measures that had raised investor concerns less than a fortnight ago. Finally, there will be no tax cut for the highest incomes. However, we doubt that the British currency is completely out of trouble. The coming months will be complicated both for the UK's economy and for the BoE. This will lead to negative repercussions for the British pound. In the very short term, however, we might see a stabilization of the EUR/GBP within the current bounds. As for the EUR/USD, the outlook has not changed from last week. The main technical level to monitor in the short term is the 0.9560 area (which acts as support). In case of a break, we could reach 0.93 (a credible target for the end of the year). The support and resistance levels displayed below indicate, respectively, the low and high points within which prices should evolve during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	0.9320	0.9560	1.0099	1.0346
EUR/GBP	0.8377	0.8560	0.8866	0.8924
EUR/CHF	0.9559	0.9635	0.9875	1.0033
EUR/CAD	1.3053	1.3256	1.3663	1.3866
EUR/JPY	139.78	140.92	145.21	147.93

This is a transition week beginning, with few macroeconomic indicators. The inflation figures for the month of September in the United States will be closely watched. Barring surprises, we should confirm that the peak of inflation was indeed reached last June but that inflation remains very volatile. This is exactly the message we retained from the August inflation data. We expect a similar observation for September. It is therefore unlikely that this will cause much upheaval in the foreign exchange market. However, central bank interventions (notably from the Bank of Japan) remain relevant. This can lead to erratic movements in the concerned currencies. Hence the need to be even more cautious than usual if you have strong foreign exchange market exposure. Below are the publications and events expected to have a major impact on currency movements.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
10/12	14:30	Producer Price Index (September)	Increase of 0.2% month-on-month after a 0.1% decrease in August (subject to revision).
10/13	14:30	Consumer Price Index (September)	Expected decline to 8.1% year-on-year from 8.3% previously.
10/14	14:30	Retail Sales (September)	Increase of 0.2% month-on-month versus 0.3% in August.