Olivia

The big revelation – From delusions to reality Twenty years ago, the single European currency was born to bridge nations and open new paths for European integration. The spread between the government bonds of the member states that adopted the single currency and those of Germany decreased almost to zero, even for countries like Greece, Italy, Spain, and Portugal, which will be tested by the financial crisis a few years later. In fact, since 2001, the member countries of the euro agreed to a Stability and Growth Pact (SGP) where all were obliged to ensure that member countries pursue sound public finances and coordinate their fiscal policies. In return, all members enjoyed the cost of borrowing as Europe's powerful economies since they would borrow at roughly the same interest rates as Germany. And this was done until 2008, as seen in the diagram below. But a few years later, with the financial crisis of 2008, everything changed. It was revealed that member states had effectively built foreign currency debt. This was true because they could not print money in Euros to avoid bankruptcy due to the high debt they had incurred. If they could do so, such a move would… Read More »Europe indirectly mutualize its debt and issue Eurobonds

USD/JPY rallies as BoJ might stay dovish The Japanese yen weakens as quantitative tightening remains a remote prospect. As its currency sank to a 32-year low, the Bank of Japan’s ultra-loose monetary policy has become increasingly at odds with the finance ministry’s view. The central bank may still deem it premature to shift away from the status quo given heightened global uncertainties. The latter, however, concerned by the yen’s unidirectional slide and its negative impacts on corporations, may choose to intervene in the market again, popping up short-term market moves. The greenback is heading towards 155.00 with 144.00 as the closest support. EUR/USD slips as energy crisis hinders inflation fight The euro remains under pressure as the ECB is expected to raise rates by 75bp. The energy price pressure in the euro zone has been a significant headache for policymakers. With inflation reaching five times the ECB’s target last month, the central bank may have little choice but to go down the path of rapid rate increases. However, unlike other major peers, the ECB will need to keep bond spreads in check or risk another debt crisis in peripheral countries. Needless to say, such a rock and hard place situation… Read More »Time to blink?

All eyes will be on the European Central Bank meeting next week. We think a 75bp hike looks like a done deal. The PMI survey on Monday will also be closely watched, providing clues on whether the eurozone economy has contracted even further. For the Bank of Canada, we expect a similar 75bp rate hike, given the upside surprise in inflation. US: The Fed cannot slow the pace of hikes yet There are lots of important numbers out for the US next week, but none are likely to change the market's forecast for a 75bp interest rate hike on 2 November. 3Q GDP is likely to show positive growth after the “technical” recession experienced in the first half of the year. Those two consecutive quarters of negative growth were primarily caused by volatility in trade and inventories, which should both contribute positively to the 3Q data. Consumer spending is under pressure though while residential investment will be a major drag on growth. We are forecasting a sub-consensus 1.7% annualised rate of GDP growth. We will also get the Fed’s favoured measure of inflation, the core personal consumer expenditure deflator. This is expected to broadly match what happened to core CPI… Read More »Key events in developed markets next week

UK Prime Minister Liz Truss stepped down this week after only 44 days in the office. The resignation follows heavy pushback on the 'mini-budget' presented in late September, which sparked fears of even more persistent inflation and much stronger rate hikes by the Bank of England. The new chancellor Jeremy Hunt has already overturned many of the spending measures introduced in the mini-budget, which has supported GBP and eased the pricing on BoE hikes. Going forward, the conservative party aims to find a new PM already next week, and the process begins by conservative MPs voting to select two final candidates on Monday. Then, the party members will cast the final deciding vote by Friday October 28 at the latest, or alternatively the less popular of two withdraws without a vote by the party members. At the time of writing, former chancellor Rishi Sunak is the most likely candidate followed by the former Prime Minister Boris Johnson. The European Council agreed on joint measures to limit energy prices largely in line with the earlier proposal by the Commission. While details still remain uncertain, the measures include 'a dynamic price corridor' to limit further rises in gas prices despite the earlier pushback by… Read More »Weekly Focus: UK political turmoil continues

A central bank extravaganza lies ahead. The show will kick off with the Bank of Canada meeting, where markets expect another rate increase but are split on the size. Meanwhile in Europe, a triple-barreled hike by the ECB is already locked in, putting the emphasis on the press conference. Finally, the Bank of Japan is unlikely to throw a life jacket to the sinking yen. 

Summary United States: Momentum Continues to Slow This week's data show that while the U.S. economy has remained resilient thus far, tighter monetary policy is certainly starting to impact some key sectors. Industrial production regained its footing in September, but there are signs of slower growth ahead, while regional manufacturing surveys support this loss of momentum. Meanwhile, the real estate sector has been significantly affected by rising interest rates, with total housing starts falling 8.1% in September. Peering ahead, the forward-looking Leading Economic Index points to a recession in the coming year. Next week: New Home Sales (Wed), Q3 Real GDP (Thu), Personal Income & Spending (Fri) International: Robust Consumer Inflation, Subdued Consumer Spending This week saw more evidence on the international front of divergent economic trends—with consumer inflation remaining rapid and consumer spending staying subdued. Inflation surprised to the upside in the United Kingdom, Canada and New Zealand. Meanwhile, retail spending data were subdued in the United Kingdom and Canada. For now, rapid inflation remains a greater concern than slower growth for foreign central banks, and we anticipate further monetary tightening in the weeks and months ahead. Next week: U.K. PMIs (Mon), Bank of Canada (Wed), European Central Bank… Read More »Weekly economic and financial commentary

ECB meeting – 27/10 – at its last meeting in September, it was widely expected that the ECB would raise rates, with the only uncertainty being around whether they would go by 75bps or 50bps. The decision to raise rates by 75bps was dictated by the upgrading of the banks inflation forecasts, which were adjusted higher to 8.1% in 2022 and 5.5% in 2023. These targets now look incredibly dated given that we now have German inflation well above 10% and the EU headline rate also into double figures with core prices at 4.8% and likely to move higher. A growing number of ECB policymakers have been increasingly vocal about the need for much higher rates, despite an acknowledgment that GDP is likely to fall quite sharply. The ECB cut its 2023 and 2024 forecasts, to 0.9% and 1.9% respectively, it raised its forecast for 2022 to 3.1%. These GDP forecasts seem extraordinarily optimistic given the energy backdrop, and perhaps speaks to a certain amount of cognitive dissonance on the part of ECB officials. The ECB said it expects to continue hiking in subsequent meetings, albeit probably at a slower pace than the Federal Reserve, although we’ve heard from a… Read More »The Week Ahead: ECB, Bank of Japan, UK banks results, Apple, Meta, Microsoft earnings

The British pound is likely to see another few months of turmoil now that Prime Minister Liz Truss has resigned. During Truss’ reign, which latest a mere 45 days, the shortest tenure in UK prime ministerial history, the pound was rocked by her government’s plan to borrow billions of dollars to fund tax cuts. On the day of the release of the ‘mini-budget’ that contained the tax cut plan, the pound fell from ~$1.12000 to its weakest level ever, with speculation that it could hit and cross parity with the US dollar, a forex reality that had only been explored once in the past, in 1985, when the super-strength of the US dollar decimated the pound (along with every other currency). The pound did recover from this crisis as Truss and her government began to backtrack on the planned tax cuts, with further support added to the GBP from an emergency intervention from the Bank of England that is a story for another day. As it stands, the GBP now has a few major events ahead of it that could kick up some volatility.  GBP/USD 4GH, with RSI The first is whether Boris Johnson, the Prime Minister that was succeeded… Read More »Will the pound recover after Truss’ resignation?

Outlook: To an overload of economic data we need to add worries about so-called stealth intervention from at least two sources, the Bank of Japan and the Swiss National Bank. Experts doubt the BoJ is intervening, despite a warning from FinMin Suzuki: “We cannot tolerate excessive currency moves driven by speculators. We are closely watching currency moves with a sense of urgency.” PM Kishida also said “speculative-driven rapid currency moves [are] problematic.” But the dollar/yen moved to a 32-year high soon afterwards at 149.29 before retreating, and not sedately. Suzuki reminded the press the BoJ had intervened before (about $18 billion) and the government doesn’t always announce intervention. He also denies the primary cause is the BoJ cap on yields, saying lots of other factors are at work. The reports end up making Suzuki looking somewhat weak. Any loss of face is to be corrected and we expect the market to back down periodically ahead of any punishment. As for the SNB conducting stealth intervention, nobody knows and if they do, they are not telling. We are willing to believe it if only one the highly unusual choppy pattern in the dollar/Swiss, even if euro/Swiss is or should be the… Read More »The most fundamental of the fundamentals is the cost of energy

Australia is expected to have created 25,000 new job positions in September. The Reserve Bank of Australia is nowhere near the US Federal Reserve's stance on monetary policy. AUD/USD’s bearish trend is likely to be unaffected by Australia’s employment data. Australia will publish its September employment report on Thursday, October 20. The country is expected to have added 25,000 new jobs, decreasing from the previous 33,500. The Unemployment Rate is expected to remain unchanged at 3.5%, as well as the Participation Rate, currently at 66.6%. Alongside the employment figures, the country will release Q3 NAB’s Business Confidence, foreseen to improve to 7 from 5 in the second quarter of the year. Encouraging data may give AUD/USD a well-needed boost, as the pair trades near the two-year low posted this month at 0.6169, but would it be enough to take it out of its misery? The RBA vs. the Fed The Reserve Bank of Australia decided to hike the cash rate by 25 bps in October, easing quantitative tightening after pulling the trigger by 50 bps for four consecutive months, which took the main rate to 2.6%. The Minutes of the meeting released this week showed that policymakers believe that the… Read More »Australian Employment Preview: Near-term relief to the long-lasting pain