Breaking News
Investing Pro 0
💎 Access the Market Tools Trusted by Thousands of Investors Get Started

Week Ahead: Forex Markets Brace for Volatility as U.S. CPI Takes Center Stage

By Marc ChandlerCurrenciesFeb 12, 2023 06:04AM ET
www.investing.com/analysis/week-ahead-forex-markets-brace-for-volatility-as-us-cpi-takes-center-stage-200635226
Week Ahead: Forex Markets Brace for Volatility as U.S. CPI Takes Center Stage
By Marc Chandler   |  Feb 12, 2023 06:04AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
EUR/USD
+0.12%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
GBP/USD
+0.03%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
USD/JPY
+0.06%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
AUD/USD
+0.23%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
USD/CAD
+0.66%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
USD/MXN
-0.69%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

After selling off sharply in the past four months, the dollar rebounded. Since the FOMC meeting on February 1, it has enjoyed one of the strongest bounces since it topped out in late September/early October. The incredible US jobs data, sharp bounce in the January services ISM, speculation of BOJ Governor Kuroda's successor, and some easing of the euphoria over China's re-opening have been notable drivers. The dramatic rise in the US two-year note illustrates the adjustment. The yield rose from the lower end of its range that goes back to the middle of last September (~4.0%) to the upper end near 4.50%. 

Market positioning was part of the pre-conditions that led to such an impulsive surge in the dollar. However, several of the currency pairs have met technical retracement targets and the market has moved to catch up with the Federal Reserve in terms of the terminal rate being closer to 5.25%. The most market-sensitive data point is the US January CPI. Japan and the eurozone provide estimates of Q4 22 GDP along with December trade and industrial output figures. The UK and Australia report their latest readings on the labor market. The UK also reports January CPI and PPI. Ironically, good news on the economic performances may weigh on stocks and bonds and unwind the easing of financial conditions seen in recent weeks.

United States: The world's largest economy seemed to have fallen off a cliff at the end of 2022. Manufacturing output and retail sales fell by more than 1% in November and December. However, the economy appears to have rebounded in January. Retail sales and manufacturing production are expected to have snapped back. We already know that auto sales rose more than expected to a 15.74 mln unit pace (seasonally adjusted annual rate), the most since May 2021. Yet, even the control measure used in some GDP models (which excludes autos, gasoline, building materials, and food services) is expected to have risen last month for the first time since October, and the 0.7% median forecast in Bloomberg's survey would be the most since last June. Even permits for new homes are expected to have ticked up last month for only the second time since the end of Q2 22. Mortgage applications are running about 18% above the late October lows as the average 30-year mortgage rate has fallen by around 100 bp to about 6.2%.

If the retail sector is recovering in early 2023, the year-over-year decline in consumer and producer prices looks set to continue. Recall that US CPI rose by 0.6.%, 0.8%, and 1.2% month-over-month in the January-March period last year. These will drop out of year-over-year comparisons. Nevertheless, we remain struck by the fact that CPI rose at an annualized rate in excess of 10% in both Q1 and Q2 22. In H2 22, it slowed to a 2% annualized pace. At issue, now, is how much of the price pressures were transitory. Of note, the reweighting of the CPI basket (annually now rather than every two years) gives owner-equivalent rents a slightly greater weight and used cars a little less. Still, even if CPI rose by 0.5% each month in Q1 23, which is not a forecast but a thought experiment, the year-over-year rate would fall near 5% in March. If repeated in Q2 23, headline CPI would be slightly above 4%. The median forecast in the Bloomberg survey has CPI at 3.8% at the end of the year. Incidentally, the median forecast sees the PCE deflator at 3.8% at year-end, while the median Fed dot plot puts it at 3.1%.

The Dollar Index met our 103.80-104.00 target. Then it held above 102.00-40 in the subsequent pullback, warning that the upside correction may not be over. A convincing break of the 104.00 area could see 104.50-105.00.

Eurozone:  At the end of January, Eurostat estimated that the eurozone economy expanded by 0.1% in Q4 22 for a 1.9% year-over-year rate. Real sector data has been limited to industrial output and some trade figures. The weakness in German industrial production in December (-3.1% vs. -0.8% median forecast in Bloomberg's survey was likely blunted by a small upward revision in the November series (0.4% vs. 0.2%), the better-than-expected French (1.1% vs. 0.3%) and Spanish (0.8% vs. 0.2%) reports. The German trade surplus fell less than anticipated though it widened rather than contracted as expected. Hence, the risk seems asymmetrically to the downside for the new Q4 GDP estimate, even if minor. Still, the Q4 may be too old to elicit much of a market reaction. Nor will the apparent precision of the estimate obscure the fact that, for all practical purposes, the eurozone stagnated in Q4. A contraction in Q1 23 cannot be ruled out yet. At the same time, the shift in sentiment downgraded the risk of a recession.

The 3.5 cent pullback in the euro since the February 2 high of almost $1.1035 is the second largest since the euro bottomed at the end of last September near $0.9535. It has been driven by the strong US employment data and service ISM, which spurred a convergence of market expectations with the Fed's dot plot. The two-year US premium over German jumped from about 146 bp on February 1, the least in a little more than a year, to almost 187 bp before consolidating. The surge in the US yield can account for the lion's share of the increase. The euro surpassed our $1.0700-50 target, falling to about $1.0665 ahead of the weekend to record a marginal new low for the week. It may need to re-establish footing above $1.0800 to repair the technical damage, without which a move toward $1.06 and possibly $1.0550 cannot be ruled out, even though the momentum indicators are getting stretched to the downside.

Japan: Better consumption and net exports more than offset the contraction in business investment to help fuel a recovery after the Japanese economy contracted in Q3 (-0.2% quarter). The median forecast in Bloomberg's survey projects a 0.5% expansion in Q4 22. The positive momentum is expected to carry into Q1 23. Two conflicting forces are pulling the exchange rate. First, and sparking the dollar's gap higher opening to start the week was the report suggesting that BOJ Governor Kuroda's possible successor boosts the chances of policy continuity. A formal announcement is expected in the coming days. However, at the end of last week, Japanese press reported that Amamiya turned down the offer. On February 14, Prime Minister Kishida is expected to nominate former BOJ board member Ueda as the next BOJ governor. Second is the economic data, including labor cash earnings and acceleration in Tokyo's January CPI, which makes many participants convinced that Japan would have to adjust its monetary policy stance. 

The gap created with the higher opening on February 6 is between JPY131.50 and JPY131.70. The USD/JPY stalled near JPY133.00. It has not traded above JPY135 since the December surprise. The gap was what technicians call a "normal gap" and was filled the following day. News of Ueda's likely appointment sent the greenback to JPY129.80, but it quickly rebounded. It returned to JPY131.50 in the North American session. Maybe our JPY135 target was aggressive, but a retest on the JPY133 area seems reasonable.

UK: The Bank of England plays down that it is on a pre-set course to hike rates again when it meets on March 23, but the swaps market sees it as about an 80% likelihood that lifts the base rate 25 bp to 4.25%. If it is data-dependent, the jobs report (February 14), inflation (February 15), and retail sales (February 17) may be critical. However, their impact may be limited because each will be reported again before the BOE meets. Moreover, it is not clear that the data will reveal anything that policymakers do not already know. Despite the economic contraction in Q4, the labor market remains tight, and wage pressure is strong. Inflation may have peaked, as the BOE judged earlier this month, but the easing of price pressures is likely to have been minor at best last month. A more substantial decline is expected with the March and April readings. At the same time, the cost-of-living squeeze and softening house prices sap consumers. Retail sales in volume terms rose only one month last year (October). The British economy stagnated in Q4, despite very weak December figures, after contracting by 0.2% in Q3.

Sterling's recovery from the record-low in late September (~$1.0350) peaked in mid-December, a little shy of $1.2450. It drew ever so slightly closer to $1.2450 last month without going above. The 5-day moving average fell below the 20-day moving average on February 3, and the momentum indicators turned lower. We had suggested potential toward the January low near $1.1840. Instead, it approached the 200-day moving average (~$1.1950 last week) and bounced back to almost $1.2200. A move above the $1.2230-65 area would bolster the technical tone, but without it, sterling seems likely to retest the lows.

Canada:  The Bank of Canada's announced pause takes away whatever (albeit limited) impact domestic data typically has on the exchange rate. That said, the reaction to a much stronger-than-expected jobs report is an exception that proves the rule. Part of the reason the BOC is going to stand pat is to evaluate the cumulative rate hikes. One area that has felt the higher interest rates is the housing market, and Canada reports January starts and existing home sales. However, the more important driver of the exchange rate continues to be the general risk appetite. The 30-day correlation eased from 0.88 in mid-December to about 0.65 in early February. The 60-day correlation is near 0.78. The 30-day correlation with WTI is less than 0.05, and the 60-day correlation is around 0.27, which is the least since last June. That is roughly the same as the correlation between changes in the exchange rate and the two-year interest rate differential. Still, the 121k increase in full-time jobs last month, the most since last May, and more about twice the monthly average in Q4 22 underscore our suspicion that the risk is that the Bank of Canada hikes rates again. The greenback posted a bearish outside down day before the weekend by trading on both sides of Thursday's range and settling below its low. The next obvious target is the recent low near CAD1.3260 and then the low from the middle of last November around CAD1.3225. The 200-day moving average begins the new week by CAD1.3235, and the US dollar has not closed below in seven months. 

Australia:  Last week's 25 bp rate hike and indication from officials that they see additional moves as necessary takes some thunder from the January jobs report on February 16. Australia created more than three-times the number of full-time employment in Q4 22 (~107k) than in Q3 (~29k). The Australian dollar approached our $0.6850 target earlier than we had expected and recovered to the $0.7000 area, where it stalled. In its monetary policy statement, the RBA noted the tightness of the labor market and cautioned that price pressures remained broad-based and too high. It revised its underlying measure of inflation (trimmed mean) to 6.25% in the middle of the year from 5.5%. It signaled that the cash rate target may be lifted to 3.75% from 3.30%. The Australian dollar popped on the RBA statement, but without establishing a foothold above $0.7000, the risk is that it may have to retest the lows again. There is scope for a test on $0.6800 if the $0.6850 area gives way.  

Mexico:  The central bank's more aggressive 50 bp rate hike last week surprised the markets and sent the peso sharply higher. Some economists had expected a quarter-point hike to have signaled the end of the tightening cycle. Moreover, Banxico made it clear that it was not done but suggested the next move could be smaller. The central bank meets next on March 30. It was the first time since last March that Banxico took a bigger step than the Federal Reserve. The overnight target rate is now at 11.0%, and the swaps market looks for a peak between 11.75%. Initial support is now seen MXN18.60-MXN18.65 band, which was entered before the weekend, but the three-year low near MXN18.50 seen in January and again earlier this month offers more significant support. In the medium term, we see potential toward MXN18.00.

China: The markets seemed most euphoric over the re-opening of China when mainland markets were closed for the Lunar New Year. However, a nearly 5% pullback in the CSI 300 brought new foreign buying. Nevertheless, the CSI finished lower for the second consecutive week. Illustrating the broader dollar recovery after the incredible jobs report saw the greenback trade from around CNY6.70 to CNY6.8145 ahead of the weekend. On Monday, January 9, the dollar gapped lower against the yuan. The gap is found between CNY6.8150 and CNY6.8280. Assuming the gap is filled, we suspect there is potential toward CNY6.88-CNY6.90. The yuan appears to be continuing to track the euro and yen. The 60-day correlations are around 0.50 and 0.42, respectively, little changed from the end of 2022. 

 

Week Ahead: Forex Markets Brace for Volatility as U.S. CPI Takes Center Stage
 

Related Articles

Week Ahead: Forex Markets Brace for Volatility as U.S. CPI Takes Center Stage

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your investing.com profile, will be public on investing.com and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (3)
Jitendar Patel
Jitendar Patel Feb 13, 2023 12:29PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
hii
Kedar desh
Kedar desh Feb 13, 2023 2:27AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
What is the forecast for jan cpi ?
Ismaël Derm
Ismaël Derm Feb 12, 2023 9:07AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Salut
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email