#Articles — 15.02.2023

Monthly Currencies Focus February 2023

Guy Ertz, Chief Investment Advisor



1.The DXY index was broadly unchanged since the beginning of the year.

2.The 3 major central banks increased their policy rate. The Fed slowed down the pace and delivered a 25bps hike, while the ECB and the BoE remained more hawkish and raised rates by 50bps.

3.The euro ran somewhat out of steam recently after the strong rally at the beginning of the year. The recent strong US labor market data increased the pressure on the Fed. We revised up our 3-month target for the EURUSD to 1.06 as we expect some consolation after the strong euro appreciation early this year. We keep our 12-month target at 1.08.

4.The Norwegian economy showed signs of a slowdown. The central bank left its policy rate unchanged in January and is likely to keep rates on hold. This was a bit surprising, and the NOK came under pressure. It changes our rate expectations. We thus revise our 3- and 12-month target to 10.6 and 10.3, respectively (value of one EUR).

5.In Latin America, the fiscal fundamentals were in the spotline. The Brazilian real is experiencing a lot of volatility as fiscal uncertainties are rising. On the contrary, Mexico’s fiscal environment has been strong and supported the currency. The currency could consolidate a bit but should remain strong. 

6.On a longer run, China’s reopening will not only be supportive of its own currency (CNY) but will also support the NZD and the AUD.



Focus on Central Banks’ decision

Since the beginning of the year and until the Fed’s decision on February 1, the EURUSD increased by almost 3%. The pair reached a peak after the Fed’s meeting at 1.10. However, it lost its steam after the ECB’s speech on the next day. The ECB suggested a possible slowdown in rate hikes. At the time of writing, the pair is trading around the 1.07 level.

The Fed’s meeting was marked by a slowdown in the pace of rate hikes (25bps) and Chair Powell’s acknowledgement that the disinflation process is ongoing. The market perceived this signal as a dovish signal. However, the labour market is still tight as shown by the employment report on March 3rd. It showed a significant and unexpected rise in jobs in January (517,000 job positions vs 188,000 expected). The unemployment rate reached a historical low at 3.4% . This fueled speculation that the Fed could hike rates more than expected.

The ECB raised its interest rate by 50bps in February. President Lagarde highlighted that another 50bps hike is expected and probably more. However, the speech was considered more dovish than before.

The euro should consolidate further in the short-term. However, on a 12-month horizon, we keep our target unchanged.

We revise our 3-month target at 1.06 (value of one euro) and we maintain our 12-month target at 1.08.


GBP  VIEW >>   TARGET 12M VS EUR: 0.88

No clear trend

The EURGBP posted a shy gain of 0.2% year-to-date. However, the GBP gained 1.4% against the euro since the Bank of England’s (BoE) decision on February 2. The central bank was perceived more dovish than before. 

The BoE voted for a second consecutive 50bps hike, bringing the policy rate at 4% and to a 14-year high. For the second time, two members of the Committee voted to leave policy unchanged. In addition, the central bank indicated that smaller hikes may be considered. This could indicate that we may soon see the end of its hiking cycle.

The British economy contracted 0.3% in Q3 and may have avoided a technical recession in Q4. However, the economy is still in the middle of a downturn. The economy should experience a negative growth in 2023 (-0.9%) while the Eurozone should prove more resilience (+0.2%).

The trade deficit amounted to GBP 1.8 billion in November, compared with a surplus the prior month. The exports dropped as fuel shipments to EU countries fell. Further widening of the deficit is expected.

Even if the BoE ends its tightening cycle, interest rates will still put pressure on the already weak British economy. This bleaker growth outlook is likely to be a headwind for the Sterling, but this seems already priced.

We maintain our 3- and 12-month targets at 0.88 (value of one euro).  This suggests a lateral move of the currency from current levels. 


CHF VIEW >>     TARGET 12M VS EUR: 0.98

CHF to stay strong

The EURCHF (value of one euro) moved slightly lower over the month and is now again below parity. The preceding increase of the pair was triggered by good news for the Eurozone (improvement in the global economic outlook, normalization of gas prices and reduced inflation risks).

The Swiss National Bank (SNB) raised its policy rate by 50bps to 1% on December. During the month of January, the Chairman Jordan stressed that inflation remains far too high and the battle against it is not over. He also stated that further increases could be envisaged. The market is leaning toward a 25bps rather than a 50bps increase in March.

Over the past year (from January 2022 to January 2023), the SNB sold more than 162 billion francs from its forex reserves.

The annual inflation rate in Switzerland fell to 2.8% in December, much lower than in the Eurozone (8.5% in January and 9.2% in December). The KOF Business Confidence rose to 97.2 in January, the highest in seven months and well above market expectations. The unemployment rate marginally rose to 2.2% in January compared to a 6.6% rate in the Eurozone. The Swiss economy still looks in better shape than its European peer. Swiss economic fundamentals should remain strong and limit the downside for the currency.

We keep our 3- and 12-month targets at 0.98 (value of one euro). This suggests a slight appreciation of the Swiss franc from current levels. 


JPY VIEW >>     TARGET 12M VS USD: 128

Recent weakness should not last

The JPY strongly rallied from mid-October to mid-January, gaining 15% during the period. The trend has somewhat reversed over recent days. The currency has depreciated 1.9% since mid-month.

The Bank of Japan left both its rate policy and its yield curve control policy unchanged in January, which surprised the market. Governor Kuroda reinforced its ultra-accommodative stance. The BoJ plans to appoint Kazuo Ueda an economist with a more hawkish stance on the current macroeconomic environment. This news helped the yen to rebound and we saw the value of one dollar fall from 131.56 to around 130.60.

Note also that the annual inflation rate rose to 4% in December, the highest level since January 1991. Similarly, the core inflation in Tokyo rose to 4.4% in January, the fastest annual gain in more than 40 years. We expect a policy shift in the coming month to fight inflation and to reach central bank’s target of 2%. This should be supportive for the yen.

Japan’s current account surplus narrowed sharply in December as imports outpaced exports. However, we expect gas and oil prices to normalize which should widen the current account surplus. This will also be positive for the currency. In addition, flow dynamics are also likely to be support the currency. We expect lower Japanese demand for US fixed income assets this year.

We see more upside for the yen after the recent depreciation. We maintain our 3-month target to 130 (value of one USD) and the 12-month target to 128. 



Positive outlook despite recent depreciation

The SEK gained 0.8% year-to-date, with a solid gain of more than 2% on the day of the Swedish central bank decision (February 9).

The Riksbank, Sweden’s central bank, raised the key interest rate by 50bps to 3% in February,  marking the highest rate in almost 15 years. The bank also signaled further rate hikes during the spring to lower inflation which jumped to a three-decade high at 12.3% in December from 11.5% in November. 

The vulnerable housing market could be a downside risk to the hawkish scenario of the Riksbank. As a large majority of mortgages have variable rates, rising interest rates would hit a lot of households. In addition, the home prices dropped -12.7% in December. It was the seven’s consecutive month of fall in house prices. This could limit the central bank’s actions and ultimately weigh on the krona.

Sweden’s trade deficit narrowed for the third consecutive month in December. The trend could continue as the outlook for its major trading partner, the Europe, improved.

We keep our 3- and 12-month targets at 11 (value of one euro). This suggests a small appreciation of the SEK from current levels. 



Moderate upside for the NOK

The NOK depreciated almost 4% since the beginning of the year. This performance is explained by the more prudent stance from the Norwegian central bank regarding future rate hikes.

In January, the central bank kept its policy rate unchanged at 2.75% but warned that the future rate path will depend on economic developments and that a 25bps increase in March in very likely. The ECB increased its rate to 3%. The bank had a more hawkish tone (reiterating the need for more rate hikes) and announced a highly probable 50bps hike in March.

December retail sales were released at -3.6%, well below consensus. Industrial production came out at -0.1% compared to an expectation of +0.6%. Inflation eased to 5.9% below market forecast of 6.1%.  Lower economic data and inflation could lead the central bank to continue its pause in the hiking cycle. The rate differential could be a headwind for the currency.

All in all, the NOK should appreciate from current levels as oil prices and risk appetite should be supportive.

We see less upside and revise our 3- and 12-month targets at respectively 10.6 and 10.3 (value of one euro). 



Little upside from current levels

The Australian dollar appreciated 2% since the beginning of the year. Hopes of a slowing pace of rate hikes from the Fed fueled this appreciation.

In February, Australia’s central bank raised its interest rate by 25bps to 3.35% and reinforced its data-dependency. The board expects further increases in the coming months to fight inflation which surged to 8.4% in December from 7.3%. Market was surprised by the hawkish tone of the central bank and increased its expectation for the terminal rate by 25bps to 3.9%, implying two more rate hikes. This will marginally improve the interest rate differential with the US and should not be a major support factor for the AUD in the short-term.

The trade surplus narrowed in December, the smallest surplus since August as exports fell amid surging global cost pressures. China is Australia’s main trading partner. We thus expect this surplus to widen again as China reopens gradually. This is positive for the AUD. All in all, we see little upside.

We maintain our 3-month target to 0.70 (value of one AUD). This is also our 12-month target. 



More upside for the NZD

The NZD was flat since the beginning of the year and is now trading around 0.63.

The Reserve Bank of New Zealand raised its cash  rates by 75bps to 4.25% in November. The central bank was very hawkish and warned that further increases are likely. Markets are assuming a 50bps hike at the policy meeting this month.

The New Zealand economy appears to be resilient. The inflation rate reached 7.2% year-on-year in Q4 at the same level of the third quarter. Sticky inflation will likely put pressure on the central bank to keep raising rates. The trade differential with the US should be a positive factor for the NZD.

However, New Zealand has a high proportion of variable-rate mortgages, and the housing market has already suffered a large slump in house prices, losing more than 20% over 2022. The trend could continue and threaten the New Zealand economy.

All in all, we see a moderate upside from current levels.

We maintain our 3- and 12-month to 0.65  (value of one NZD). This suggests a moderate appreciation of the NZD from current levels. 


CAD VIEW >>    TARGET 12M VS USD: 1.30

Moving closer to our target

The CAD gained around 0.85% year-to-date. Lower rate expectations in the US explain this trend.

The Bank of Canada (BoC) lifted its overnight rate by 25bps to 4.50%. The central bank stated that there are visible signs that the economy has cooled down in response to higher borrowing costs and notified a likely pause in its tightening cycle.

Inflation has peaked in June at a 39-year high of 8.1%. Since then, it fell consecutively each month and hit 6.3% in December.

The CAD is a risk-on currency, meaning that it has a positive correlation with other risky assets. Thus, the expected rise in global risk sentiment should be supportive for the currency.

We also see a better economic momentum relative to the US as we forecast more upside for oil prices and a sharper slowdown in the US economy. This is positive for the Canadian dollar.

We maintain our 3- and 12-month target to 1.30 (value of one dollar). This suggests a moderate appreciation potential from current levels.



More strength ahead

The CNY appreciated by 1.4% since the beginning of the year. The currency reacted to China’s reopening as well as the smaller rate hike from the US central bank.

In January, the People Bank of China (PBoC) left its 1-year Medium Term Lending Facility (MLF) unchanged. February 15, we expect the central bank to announce again no change in its policy rate. We believe the PBoC will prefer to take time to observe the pace of the economic recovery.

In addition, the central bank increased its liquidity injections by CNY 506 billion in January to prop up growth. This should support the yuan.

The faster-than-expected reopening of China leads us to adjust our 2023 growth forecast to the upside. The brighter economic momentum has turned more favorable for the Chinese currency. The expected fall in US bond yields might is also likely to support the currency.

We maintain our 3- and 12-month targets at 6.75 and 6.50, respectively (value of one dollar). This suggests a moderate appreciation of the CNY from current levels. 



Current volatility to fall

The USDBRL fluctuated a lot since the beginning of the year. After reaching a 5-month high at 5.48 in early January, the pair is now trading around 5.25 (value of one dollar).

In February, the Brazilian central bank left its rate at 13.75% for the fourth straight meeting. The surprise came from the central bank statement which underlined that it might held policy rate unchanged for longer than market forecasts. The annual inflation was stable (5.79% versus 5.77% before). However, inflation estimates for 2023 rose as the current fiscal uncertainties increased.

Although, relations with Western countries have improved, the political divide can still be seen in Lula’s internal fiscal and monetary policy. President Lula’s administration wants to loosen fiscal policy, and this could increase inflation.

The recent discord between the government and the central bank is a concern for markets and could weigh on the currency.

Short-term, the BRL should be impacted by the political uncertainties. On a longer horizon, improved relations with Western countries should however support the currency.

We maintain our 3-month target at 5.4. (value of one USD) and our 12-month target at 5. This suggest a moderate appreciation from current levels. 



Consolidation  after sharp appreciation

The MXN gained more than 4% since the beginning of the year driven by assumptions of a slower pace of the Fed’s hiking cycle and improving fundamentals for Mexico.

The central bank raised its policy rate by 50bps to 11% in February. Mexico’s annual inflation accelerated for the second consecutive month in January to 7.91% from 7.82% in December. These strong inflationary pressures stem from consumer goods and services. The core inflation rate also increased to 8.45% from 8.35% in January, meaning that the central bank’s fight against the inflation is still ongoing.

Unlike its peers, Mexico has been exhibiting fiscal discipline since before the pandemic. The strong fiscal fundamentals are positive for the currency.

The balance of trade moved into positive territory in December. The low net exposure of Mexico to global energy prices and to industrial commodities should be supportive.

Most of the good news are probably priced. We revise our 3-month target to 19 (value of one USD) and maintain our 12-month at 19.5. This suggests a moderate depreciation of the MXN from current levels.