Two Opposing Views

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The macro point

Last week was shortened by Thanksgiving celebrations in the United States, leading to a decrease in trading volumes on major financial markets, including Forex. However, there was significant news on the macroeconomic front and at the level of central banks. The Reserve Bank of New Zealand raised its key rate by 75 basis points in hopes of reducing inflation. It has remained above 7% for nearly two quarters. This is obviously painful. This provided welcome support to the New Zealand dollar, which shows an increase of more than 4% in monthly variation against the euro. More rate hikes are expected. This is particularly the case in the eurozone and the United States. Minutes from the latest meetings of the European Central Bank (ECB) and the US Federal Reserve (Fed) confirmed that rate hikes are inevitable next December. However, they won't be of the same magnitude on both sides of the Atlantic. The ECB Governing Council members expressed strong concerns about the upcoming recession (and especially its effect on the real estate market and the labor market). Nonetheless, they consider that the short-term priority remains the fight against inflation. A majority of members advocate for a rate hike of 75 basis points next month. The discourse is a bit different on the other side of the Atlantic. The Fed minutes clearly open the door to a future slowdown in the pace of monetary policy normalization (moving from 75 basis points to 50 basis points). This could occur as early as the meeting on December 14 (which will also be an opportunity for the central bank to update its macroeconomic projections for the coming two years). If the slowdown is confirmed (which is not yet certain), it could further penalize the US dollar in the foreign exchange market. Since the end of September and its peak above 114, the dollar index (which measures the variation of the greenback against the currencies of its main trading partners) has been in a downward cycle. It currently hovers around the 105 level. We could potentially go lower, towards the support zone of 100 according to us (which hasn't been reached since last April). It's certainly too early to know if the observed decline (which is not minor) is a lasting trend reversal. This will depend on the monetary policy announcements to be made in the coming weeks and the extent of the economic slowdown in the United States (will there be a recession or not in 2023?). On the other side of the globe, in Asia, the economy remains depressed in several countries, especially China and Japan. In Japan, activity in the manufacturing sector has significantly declined in November. This is the sharpest contraction in two years. Unsurprisingly, international demand is decreasing due to persistent inflation, which is penalizing the industrial base of the Japanese archipelago. The contraction in activity also reflects the difficulties of the Chinese economy (the economies of China and Japan are highly intertwined despite the political divergences between the two countries). The resurgence of Covid cases in China and the enforcement of stricter lockdown measures raise concerns about a significant slowdown in the country's growth in the fourth quarter. In 2009-10, China had taken over from developed economies that were facing the global financial crisis. This allowed a quick return to growth. This is no longer the case. China's positive contribution to global growth is now minimal. According to the World Bank, the country only accounts for 10% of the global growth impetus compared to 30% in 2019 (which was equivalent to the combined contribution of the United States and the eurozone). Worryingly, faced with the current crisis, there is no obvious growth relay for the global economy (unless the United States escapes the recession). In the foreign exchange market, the EUR/USD experienced an upward slope almost all of last week. But the euro's progress was abruptly halted approaching the resistance zone located at 1.0505. As long as this technical level has not been crossed, it limits the upward potential of the pair. From our point of view, an announcement from a central bank is the only lever allowing a lasting breakout above 1.05. Volatility on the pair was quite high on Friday (in the absence of American traders who were far from their screens due to Thanksgiving). Thus, the EUR/USD lost more than 40 pips in less than twenty minutes without it being justified by any announcement. It's likely the fault of trading algorithms (probably an unwinding of large positions). Hence the importance of having a good hedging strategy when volumes are dwindling. On its part, the EUR/CAD continues its rise (which has been ongoing for about six months). Earlier in the year, the restrictive monetary policy of the Bank of Canada (BoC) had helped the Canadian dollar. But that was without considering the decline in commodity prices. WTI oil (which is the benchmark for the American market) lost another 0.87% on a weekly basis and now trades well below the $80 per barrel level. This penalizes the Canadian currency in the long term (important positive correlation with commodities). We are long (meaning buyers) on the EUR/CAD pair. The next technical level to watch is the resistance zone located at 1.3974. The supports and resistances shown below respectively indicate the low and high points within which rates should evolve over the course of the week.

	SUPPORTS	HEBDO	RESISTANCES	HEBDO
	S2	S1	R1	R2
EUR/USD	1.0274	1.0341	1.0505	1.0587
EUR/GBP	0.8365	0.8480	0.8677	0.8756
EUR/CHF	0.9630	0.9722	0.9904	0.9999
EUR/CAD	1.3461	1.3657	1.3974	1.4050
EUR/JPY	142.25	143.73	146.22	147.80

The upcoming week will be important for economic diagnostics. This week, the US employment report is released (Friday). It is the last report before the Fed's December meeting. The latest labor market indicators (especially weekly unemployment claims) suggest an impending rise in unemployment, but still limited in scope. This should not significantly influence the Fed's monetary policy in the short term. However, if the ISM manufacturing index comes out at 50 in November (the threshold separating activity contraction from expansion), it may heighten recession fears across the Atlantic. Obviously, this will be closely monitored by FOMC members. By Friday evening, it's certain we will have better visibility on the real state of the US economy. On the European side, there are few statistics. Tomorrow, Germany releases its inflation estimate for November. It is expected to still be too high (above the 10% annual variation threshold). The good news is that it should drop slightly. Below you will find publications and events that should have a major impact on currency rate developments.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
29/11	14:00	Consumer Price Index (November)	Decrease initiated (10.1% versus 10.4% in October)
	16:00	Conference Board Consumer Confidence Index (November)	Increase to 103.0 against 102.5 in October according to consensus.
30/11	14:15	ADP Employment Report (November)	Decline to 203k against 239k in October (figure subject to revision)
01/12	16:00	ISM Manufacturing Index (November)	Analysts predict an ISM exactly at the 50 level separating contraction from expansion. Increased recession risk in the US?
02/12	14:30	Labor Department Employment Report (November)	To be watched very closely. It is the last assessment of the US labor market before the mid-December Fed meeting.