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Currency markets remain volatile amid mixed US data

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23 January 2023

Written by
Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

Last week saw volatile trading in currency markets without the emergence of any clear trend.

terling was the week’s winner, as markets ignored weakness in UK retail sales, while the yen underperformed all other G10 currencies when the Bank of Japan kept its ultra-loose yield curve management policy intact at its January meeting. Emerging markets currencies were mixed, as strength in the Chilean peso and most East Asian currencies were offset by sharp falls in the Brazilian real and South African rand. Political concerns are mounting, particularly in the case of the former.

This week is relatively quiet in terms of policy announcements, but there will be quite a bit of macroeconomic reports. We expect to see a meaningful rebound in the Eurozone indices as fears of recession recede. The PMIs of economic activity for all the major economic areas are released on Tuesday. Later in the week, attention will be focused on the first read of US fourth-quarter GDP growth (Thursday) and the US PCE inflation report (Friday). The former is expected to show healthy growth, and the latter should confirm the modest downward trend in core inflation – both should be welcome news to the Federal Reserve.

Figure 1: G10 FX Performance Tracker [base: USD] (1 week)

Source: Refinitiv Datastream Date: 23/01/2023


The UK saw the same kind of mixed bag of economic data as the US. The employment report for November was strong, notably the surprise to the upside in nominal wage growth, and core inflation once again showed no sign of easing. December retail sales were weak, however, perhaps dragged down by the cold snap and the timing of the World Cup.

Figure 2: UK Retail Sales (2021 – 2022)

Source: Refinitiv Datastream Date: 23/01/2023

Markets chose to focus on the positives and sterling topped the G10 tables last week, closing at the highest levels against the dollar since last summer. We still expect the Bank of England to hike its base rate by 50bps next week, even as the Fed downshifts to just 25 bp., so the path of least resistance for the pound in the short-term appears to be up. The key for sterling will be the consensus, or lack of it, in favour of additional tightening beyond next Thursday’s MPC meeting.


Optimism continues to rise that the European economy will avoid a recession. This week, investor sentiment and new car registrations added to the upbeat mood, but the main confirmation will have to come from the PMIs of business activity for January that will be published on Tuesday morning.

China’s exit from zero-COVID continues to fuel the euro rally, as does the sense that while the Fed can afford to downshift its monetary tightening, the ECB cannot. A couple of ECB speakers, including president Lagarde, should provide further confirmation of the recent hawkish pivot and help the euro along. ECB member Knot, who is admittedly one of the more hawkish members of the committee, said at the weekend that he expects the Governing Council to raise rates by 50bps at both the February and March meetings, with more to follow thereafter. Should other ECB members echo this sentiment, then the euro could be in for a good week.


We saw a dump of mixed economic data reports out of the US last week. Strong labour market data, notably another sharp drop in initial jobless claims, contrasted with weakness in the admittedly very volatile monthly retail sales data. Interest rates experienced a volatile week but ended up more or less where they had started.

Federal Reserve officials are unlikely to make market-moving statements so close to the key February meeting, but the GDP numbers and, more importantly, the PCE inflation report could affect the narrative that the Fed is close to done in its tightening cycle. We will be paying close attention to the PCE core inflation number, perhaps the single most important inflation indicator in the eyes of the central bank.

Figure 3: US Retail Sales (2021 – 2022)

Source: Refinitiv Datastream Date: 23/01/2023


The yen was the clear underperformer in the G10 last week, as the Bank of Japan unexpectedly kept policy unchanged at its meeting on Wednesday. Following the December BoJ meeting, when the bank shocked investors by tweaking its yield curve control policy, speculation was rife that policymakers would announce something similar last week, so the lack of action was a clear bearish signal for the yen. Indeed, governor Kuroda forcefully pushed back against the prospect of tightening, which was equally surprising.

Despite last week’s announcement, we continue to hold a bullish view on the yen this year. Kuroda will be replaced as governor in April, and it looks likely that tighter policy will be on the way after then. We look to Thursday’s inflation data to reinforce this narrative, with fresh highs in both the headline and core prints expected by economists.


During rather mixed trading, the Swiss franc continued to hover around the key parity level on the euro last week – initially rallying, only to give up its gains later in the week. Speaking on the topic of additional rate hikes at Davos last week, SNB governor Jordan said that ‘some tightening is probably on the cards’. We have little doubt that the SNB will, indeed, raise rates again in March, although as is the case among most G10 central banks, the SNB appears to be nearing the end of its tightening cycle.

Swiss sight deposits increased by 2.6 bn CHF in the week ending 13th January. This isn’t a particularly large change, though it’s worth noting that increases in sight deposits have been a rare occurrence in recent months and this is the largest since early-May. Since the bank began engaging in liquidity absorption in September, sight deposits have dropped markedly, as the bank intervenes in the FX market to boost the currency. We’ll continue to monitor this data, as additional increases in deposits could suggest that the bank is moving away from its supportive approach towards the franc.


Last week’s soft Australian labour report contributed to the slight underperformance in AUD, which ended modestly lower on the US dollar. According to the report, a net 14.6k jobs were shed in Australia last month – the first drop in employment since July. That said, risk sentiment appears to be the single biggest driver for the Australian dollar at the moment, notably headlines out of China. With markets in Asia closed for the Lunar New Year holidays, we could see limited support for AUD on this front in the coming days.

This Wednesday’s Q4 inflation data will be a key test for the Australian currency, with the lack of any downtrend likely to heighten expectations for another 25bp hike from the RBA when it next convenes in early-February. In the meantime, today’s PMI data could also receive some attention among investors.

Figure 4: Australia Employment Change (2021 – 2022)

Source: Refinitiv Datastream Date: 23/01/2023


The New Zealand dollar outperformed all of its G10 peers last week, including its Australian counterpart. There was not necessarily a clear rationale for the move, which we assign mostly to valuation as the kiwi has underperformed in the past couple of months, despite New Zealand’s close economic ties with China. The resignation of Jacinda Ardern as PM stole most of the headlines, though we do not believe that this had any real impact on currency markets. Fourth quarter inflation data, out on Wednesday, will be the key economic data release in New Zealand this week. A modest easing in the headline rate is priced in, though we believe that a fairly large downside surprise will be required to materially dampen RBNZ interest rate expectations.


Once again, the Canadian dollar traded largely in line with its US counterpart last week, as markets await this Wednesday’s Bank of Canada meeting, which we think is one of the hardest to call for some time. The BoC appeared to end its tightening cycle following its December meeting, but signs of sticky inflation and a red hot labour market have fuelled bets in favour of another 25bp rate hike this week.

As things stand, markets are not entirely convinced, with a 25bp move roughly 70% priced in. As this is not yet fully priced in by markets, we could get a modest move higher in the Canadian dollar in the event of another hike, though the extent of the move may depend on the tone of communications. Should the BoC formally end the tightening cycle, then gains in CAD could be limited, whereas a sharp rally could be on the way should the bank leave the door ajar to further action, if deemed necessary. Of the two scenarios, we think that the former is more likely.


The Swedish krona ended last week higher against the euro, with the EUR/SEK pair trading around the 11.5 level. We partly attribute this rebound to the general improvement in risk sentiment. Moreover, comments from Riksbank members have taken on a more hawkish tone, which also contributed to the rally, notably member Breman who warned over the risks of a weaker krona.

Markets are now pricing in around 100 basis points of hikes in the next two Riksbank meetings, with investors expecting the base rate to settle at 3.5%. In our view, this seems realistic given Sweden’s still high inflation levels. The December retail sales and unemployment data, due this week, will give us an insight into how the economy is holding up in light of the continued inflation overshoot, and will likely be highly important for rate hike expectations.


The Norwegian krone ended last week practically unchanged against the euro, despite the pause in Norges bank’s tightening cycle, as the central bank indicated that there could be another rate hike in March. The Norges Bank decided to leave interest rates unchanged at 2.75% at its meeting last week, making it the first G10 central bank to pause its tightening cycle. In justifying its decision, the bank said that the policy rate has risen considerably in a short period of time, and that monetary policy has started to have a tightening effect on the economy.

Governor Ida Wolden Bache has anticipated that rates will ‘most likely’ be hiked again in March. In her communications, she noted ‘it will be necessary to raise the policy rate somewhat further to bring inflation closer to the target’ and that the future path of policy would be dependent on economic developments. We think that the bank will probably raise rates by 25 basis points in March, thus ending its tightening cycle with an interest rate of 3%.


The Chinese yuan was among the worst-performers last week, selling off against all of its Asian peers except for the Japanese yen, in what may have been a seasonal fluctuation ahead of the Lunar New Year. Last week’s Q4 GDP data surprised to the upside, showing flat quarterly growth instead of an expected contraction. Hard data for December was similarly better-than-expected. Additionally, in line with consensus, China’s key loan prime rates was kept unchanged. The one-year LPR quoted at 3.65%, while the five-year (a reference for mortgage rates) was held steady at 4.30%. We cannot entirely rule out another adjustment in the coming months, albeit the need for it appears to be less pressing due to the reopening and resilience of recent data.

We’ve entered a quiet, Lunar Year holiday period in China. This means that no economic data will be released until 31st January. That said, we’ll keep an eye out for Covid headlines. Importantly, Wu Zunyou, China’s CDC chief epidemiologist, who previously warned about recurring waves of the virus, recently played down the risk, stating that about 80% of people have already been infected under the current wave. This provides hope that China’s economic recovery will start sooner than initially thought.

Economic Calendar (23/01/2023 – 27/01/2023)