Weekly FX Market Recap: Oct. 31 – Nov. 4, 2022


 Thanks to rumors that China may end its zero-COVID policy and strong jobs data from New Zealand, the Kiwi took the top spot this week.

Souring U.K. business sentiment and more interest rate hikes from the Bank of England reversed the pound’s recent bullishness, taking it to the bottom among the currency majors.

Notable News & Economic Updates:

Russia launched missile attacks across Ukraine on Monday; also pulls out of agreement to allow Ukraine to export grains from Black Sea ports

China Caixin manufacturing PMI improved from September’s 48.1 to 49.2 in October; Chinese official non-manufacturing PMI moved down from 50.6 to 48.7 in October (vs. 50.2 forecast)

On Wednesday, North Korea launched at least 23 missiles into the ocean, one of which came down fewer than 60 kilometers (40 miles) off the coast of South Korea, an act the country’s president, Yoon Suk-yeol, referred to as “territorial incursion.”

After pulling out of the agreement on Monday, Russia announced on Wednesday that it would restart its involvement in the deal to open up grain exports from Ukraine

J.P.Morgan Global manufacturing PMI for October: 49.4 vs. 49.8 in September; new order and output index weakness accelerated, while employment conditions and future output expectations showed optimism

EIA Crude oil inventory decreased -3.1M bbl w/w to 436M bbl vs. a 2.6M bbl w/w increase the previous week

S&P Global Price Pressures index fell to 0.9 in October, indicating a slower pace of rise in commodity prices; the Global Supply shortages Index fell to 2.7, showing supply pressures continued to ease.

On Wednesday, the FOMC raised the Federal Funds rate 75 bps as expected to new target range is 3.75%-4.00%; signaled that the terminal rate will likely be higher that previously thought at the September meeting

North Korea fired three missiles on Thursday, one of which suspected of being an intercontinental ballistic missile. This triggered alerts in Japan and South Korea for residents to seek shelter

J.P.Morgan global composite output index fell to 49.0 in October vs. 49.6 in September; all sub indexes fell with exception to Employment and Output prices

Intermarket Weekly Recap

On Monday, bond yields and the dollar moved higher, while risk assets saw some red. This was possibly due to a combination of factors, including a poor business survey update from China during the Asia session, with some geopolitical headlines (Russia launching missile attacks and pulling out of a grain export deal) in the mix. It’s possible too that traders may have  lightened up on risk ahead of the highly anticipating monetary policy statement from the Federal Reserve on Wednesday.

Early in the following Asia session, risk sentiment turned somewhat positive, possibly on a string of improved business survey data from Asia (most notably from China, South Korea and India). We also saw the first signs of rumors that China may gradually exit their zero-COVID policy during the Asia session, which would be a massive tailwind to global growth if true.

As expected on Wednesday, market volatility was relatively subdued during the Asia and European session as traders awaited the latest FOMC monetary policy statement, which as usual, did not disappoint.

The market got exactly what was anticipated in terms of a 75 bps interest rate hike, but it wasn’t until Fed Chair Powell gave his speech that the party really got going. He re-iterated that the focus was to turn inflation conditions around, and he changed up the tone a bit with commentary that the terminal rate will likely need to be higher than previously thought at the September meeting. His statement dashed hopes of a Fed pivot, something risk-on traders have been hoping for for some time now.

The negative risk sentiment reaction to the Fed continued through Thursday, but we did see crypto break from the pack, possibly on news that Fidelity (one of the world’s largest brokers with $9.9T in assets) will launch a commission-free crypto trading product to retail investors.

On Friday, we saw risk-on sentiment through the Asia and London session, possibly off of more rumors that China may be scaling back from zero-COVID. But that sentiment saw a quick turnaround during the morning U.S. session as the U.S. employment update showed continued strength.

This of course further supports the idea that the Fed will likely aggressive with tightening for longer, but there were data points in the report (a tick higher in the unemployment rate; slowest pace of wage growth in a year) that suggest there are cracks in the jobs market starting to form.

In FX, the turn toward bullish risk sentiment behavior was again likely thanks to China zero-COVID rumors, and with strong New Zealand jobs data the Kiwi to the top spot among the forex majors. On the other end of the spectrum, the British pound lagged big time as the business mood worsens, with no help from interest rate hikes from the Bank of England on Thursday to sour the U.K.’s outlook further.

USD Pairs

Dallas Fed manufacturing index for October: -19.4 vs. -17.2 previous; outlook index remained negative and mostly unchanged at -9.1; employment index rose to 17.1

Chicago PMI for October: 45.2 vs. 47.0 forecast and 45.7 previous

S&P Global US Manufacturing PMI fell to 50.4 in October vs. 52.0 in September, but above preliminary read of 49.9

JOLTS job openings rose in September to 10.7M vs. 10.3M in August

ISM Manufacturing PMI for October: 50.2 vs. 50.9 in September; Price index fell to 46.6 vs. 51.7 prev.; Employment Index at 50 vs. 48.7 previous

ADP U.S. Private paryolls in October: 239K vs. 195K forecast/192K previous; wage growth slows slightly to 7.7% y/y

FOMC raised the interest rates by 75 bps on Wednesday as expected:

Market focus shifted from the pace of rate of hikes to where the terminal rate may be. Powell said that the possible terminal rate will likely be higher than what they thought at the September meeting

Powell also emphasized that the biggest risk is not tightening enough, which may lead to entrenched inflation conditions. Not even thinking about pausing or pivoting.

Thomas Barkin and Susan Collins, regional Fed presidents, both said on Friday that they believe additional interest rate hikes are necessary but may slow down in pace of hikes

U.S. Non-farm payrolls for October: 261K vs. an upwardly revised 315K in September; unemployment rate rose to 3.7% vs. 3.5% previous; Average hourly earnings rose +0.4% m/m vs. +0.3% m/m forecast

GBP Pairs

U.K. manufacturing PMI fell to 46.2 in October vs. 48.4 in September, a 29-month low; new orders fell at its fastest pay since 2020. Input and output prices continue to rise at above average rate.

U.K. nationwide house price index fell -0.9% m/m in October, the first fall since July 2021

U.K. BRC price shop index for October was up 6.6% y/y vs. 5.5% estimate, 5.7% previous

In a 7-2 vote by the MPC, the Bank of England hiked the bank rate by 75 bps to 3.00%, the largest interest rate hike in 33 years.

U.K. Construction PMI for October: 53.2 vs. 52.3 i n September

The Bank of England’s Chief Economist, Huw Pill, said on Friday that interest rates will have to go well above 3.00%, but sees the market expectation of 5.25% as too high.

EUR Pairs

German retail sales rebounded by 0.9% m/m vs. projected 0.5% m/m dip in Sept

Eurozone preliminary inflation data for October: 10.7% y/y vs. 9.9% y/y previous; core CPI at 5.0% y/y vs. 4.8% y/y forecast/previous

Even though the likelihood of a euro zone recession has grown, the European Central Bank must continue raising interest rates to combat inflation, according to ECB President Christine Lagarde on Tuesday; “We are determined to do what is necessary to bring inflation back to our 2% target.”

Germany Import Prices for September: +29.8% y/y and -0.9% m/m; Export Prices: +16.8% y/y and -0.6% m/m

ECB Governing Council member Gabriel Makhlouf said on Wednesday that it’s too early to know how much interest rates need to be raised at the December meeting.

Eurozone Manufacturing PMI for October: 46.4 vs. 48.4 in September; output continues to rapidly weaken; supply-chain issues eased; operating costs continue to rise

Germany Manufacturing PMI: 45.1 in October vs. 47.8 in September; Employment conditions resilient, even with business confidence falling

ECB President Lagarde communicated on Thursday that a ‘mild’ recession would not be enough to slow rate hikes

ECB Governing Council member Martins Kazaks says it’s impossible to know what the peak rate will be

Euro area unemployment for September 2022 was at 6.6% vs. 6.7% in August; EU at 6.0% vs. 6.7% previous

German factory orders tumbled 4.0% m/m in Sept vs. projected 0.5% dip

Euro area industrial producer prices was up 1.6% m/m and EU was up by 1.5% m/m in September

Eurozone Services PMI declined once again to 48.6 in October vs. 48.8 in September

CHF Pairs

Swiss retail sales accelerate from 3.0% to 3.2% y/y in Sept

On Monday, The Swiss National Bank said it lost CHF142.2B ($142.6B) in the first nine months of 2022

The procure.ch Purchasing Managers’ Index fell to 54.9 in October vs. 57.1 in September

Switzerland inflation rate falls to 5-month low of 3.0% y/y in October vs. September’s 3.3% y/y increase

CAD Pairs

Canada manufacturing PMI for October: 48.8 vs. 49.8 in September; new orders and operating conditions continue to fall rapidly

During testimony to the Senate’s banking, trade and economy committee Tuesday evening, BOC governor Tiff Macklem defended his choice to raise interest rates at a slower rate than the markets anticipated; he also set the expectation that interest rates changes can go either way in terms of spend and direction, but overall, the BOC thinks there are more hikes to go.

Canada added 108K jobs in October, much higher than the 10K forecast; the unemployment rate held steady at 5.2%

Canada Ivey PMI decreased to 50.1 in October vs. 59.5 in September; all sub indexes dipped with exception to the Prices Index, which rose to 69.8 vs. 68.1 previous

NZD Pairs

NZ building permits recover by 3.8% in September after 1.6% decline in August

Global dairy prices fell -3.9% from the last auction to $3.537

New Zealand House Prices dipped -0.6% y/y in October, the first decline in 11 years

New Zealand employment rose by 1.3% q/q in Q3 vs. projected 0.5% uptick

AUD Pairs

Australia’s MI inflation gauge slowed from 0.5% to 0.4% in October

Australian private sector credit rose 0.7% in Oct, following 0.8% increase

Australia’s retail sales increased by another 0.6% vs. 0.5% forecast in Sept.

The Reserve Bank of Australia (RBA) raised the cash rates by 25 bps to 2.85% as expected on Nov. 1; the RBA sees inflation peaking at 8.00% y/y from previous forecasts of 7.75% y/y

Australia manufacturing PMI for October: down to 52.7 vs. 53.5 in September; new orders expanded thanks to rising demand; employment conditions improve but at slower pace

Australian building approvals fell by 5.8% m/m vs. projected 10.0% slide in Sept.

Australia’s services PMI eased from September’s 50.6 to 49.3 in October

Australia’s trade surplus jumped to a three-month high of AUD12.44B in September

In its latest Statement on Monetary Policy, the RBA sees unemployment rising faster in the year ahead, as well as higher inflation conditions

JPY Pairs

Japanese consumer confidence index slumped from 30.8 to 29.9 in Oct.

Japanese housing starts slowed from 4.6% to 1.0% growth in Sept.

Japanese retail sales rose 4.5% y/y in September (vs. 4.1% y/y forecast)

Japan factory output for September: 1.6% m/m (-1.0% m/m forecast)

Finance Ministry: Japan spent record $42.8B in October interventions to prop up yen

Japan’s manufacturing PMI down from 50.8 to 50.7 in October, the softest pace since January 2021

BOJ governor Haruhiko Kuroda stated on Wednesday that the bank is open to modify its yield curve control (YCC) strategy in the future if inflation picks up.

Japan’s Finance Minister Suzuki spoke to parliament on Wednesday, sharing his concern on how the yen’s steady fall will hurt the economy through higher import prices.

Japan Services PMI for October: 53.2 vs. 52.2 in September; survey shows that employment levels increased and inflationary pressures remain high