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The first half of 2022 ended fittingly last week with a brutal beating of risk assets. Currency markets are currently driven by recession fears, and much less by central bank policies or interest rate differentials. The dollar has benefited from this. This was also clearly visible last week.Stock prices fell and government bond yields fell sharply, while the greenback rose sharply against all of its major counterparts except the Swiss franc and the Japanese yen.
The latter seems to want to make a comeback as a safe haven. Emerging market currencies fell against the dollar, but largely held up against European currencies. It seems that some investors are being tempted to buy this currency by existing undervaluations and huge interest rate differentials that are favourable to this currency.
The sharp rise in recession fears is, in our view, unfounded. This week's U.S. jobs report is therefore going to be very important. We expect it to be another strong report, with above-trend job growth, unemployment at an all-time low and healthy growth in nominal wages. All of this should alleviate the anxiety somewhat. In addition, the minutes of the latest meetings of the Federal Reserve and the ECB will be published this week. These should provide more clarity on the compromise that central bankers are making between containing inflation and the risk of a sharp stagnation of the economy. Below are the main currencies in detail:
In the US, there are indications that inflation has peaked, but this is not yet the case in the eurozone, partly because energy prices have more influence here and partly because economic data here generally lag behind current events. The development of the key figure last week was not too bad. This was entirely due to one-off government measures in Germany. In Spain, inflation was in the double digits, making for bad headlines. On a more positive note, the unemployment rate fell to a new low. Hardly anyone noticed this. A 25 basis point hike at the next meeting is all but certain, and a 50 basis point hike is expected at the meeting after that. We think that at current levels, a lot of bad news has already been priced into the value of the single currency, and that there is room for a decent rebound if and when risk assets stabilise.
Most of the UK's economic data last week was as expected, but there was one notable and worrying exception: the current account deficit was a downside surprise. It is now just under 10% of GDP. Of course, these figures have been clouded by the huge increase in energy prices (the UK imports energy), but this is an important indicator to keep an eye on. No major news is expected this week, so trading in the British pound will be determined by developments elsewhere. However, a number of public appearances by representatives of the Bank of England are on the agenda.
In the U.S., there were some encouraging signs last week that inflation is at least stopped rising. The core figure of the PCE, the index of private consumption expenditures, was lower than expected and now seems to be stable at a level of around 4% year-on-year. That's uncomfortably high, but significantly lower than headline inflation. With the prices of the commodities food and energy no longer rising and some even falling, inflation could come down in the coming months. In our view, the Fed is now unlikely to raise rates by another 75 basis points, which is at least somewhat 'bullish' for the euro and risk assets in general.
About Ebury:
Ebury Makes international markets more accessible with tailor-made foreign exchange services and flexible trade credit for businesses. Ebury works with more than 12,000 organisations and carries out €12 billion in foreign exchange transactions in 140 different currencies. The company has offices in the United Kingdom, the Netherlands, Spain, and Poland. Ebury's priorities:
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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
