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Poor economic data puts pressure on dollar

2023-01-22
1210

[The market expects that USD/JPY may fall below 120 by the end of this year]

With inflation at its highest in decades and the prospect of future wage growth, the Bank of Japan is ripe for monetary policy normalization. This will support further strengthening of the yen, which may fall below 120 before the end of the year. Japan's full reopening to foreign tourists should also help the yen strengthen. If the negative risk outlook for the global economy and equities materializes, and other G10 central banks are forced to cut rates as the market is currently pricing in, the yen's safe-haven status should strengthen.

[U.S. economic data is poor and the economic outlook is worrying, putting pressure on the dollar]

The Fed's Beige Book showed that overall U.S. economic activity has remained relatively steady since the last report, and overall, sources expect little growth in the U.S. economy in the coming months. Product selling prices increased at a modest or moderate pace in most regions, but many said the pace of price increases had slowed compared to recent reporting periods. Employment continued to grow at a modest pace in most regions. Overall, respondents generally expect a small increase in the coming months. Wage pressures remained elevated across regions, although five Reserve Banks reported that these pressures had eased.


[Fed officials continue to release hawkish remarks to support the dollar]

St. Louis Fed President James Bullard said interest rates must be raised further to ensure that inflationary pressures subside. "We've pretty much entered a zone that we might call restrictive, we're not quite there yet," Bullard said. Officials want to ensure that inflation falls steadily to the 2 percent target. We don't want to vacillate on this. ”. Bullard added that "austerity must remain in 2023" as the process of fighting inflation unfolds. Bullard predicts rates will be in the range of 5.25% to 5.5% by the end of the year.

[UK consumer price index (CPI) fell for the second consecutive month]

Data released by the British Office for National Statistics on the 18th showed that the British consumer price index (CPI) in December 2022 rose by 10.5% year-on-year, falling for the second consecutive month. The decline in inflation levels in December confirmed that the peak of British inflation has passed, but because the decline is slow and still far from the 2% inflation target set by the Bank of England, the pace of interest rate hikes by the Bank of England may continue.

[Eurozone GDP may grow slightly in 2023]

Markets have raised their forecasts for the euro zone's GDP growth this year, to 0.2% growth in 2023, compared with a previous forecast of a 0.5% contraction. The pessimism eased at the start of the year. Confidence in the euro area's economic outlook has improved in early 2023, especially compared with parts of mid-to-late 2022, when the risk of a deep and prolonged downturn in energy-related economic activity appears high. However, market analysis warns against an overly optimistic view of economic growth

[It is expected that the Riksbank will raise interest rates by 75 basis points, but the possibility of 100 basis points cannot be ruled out]

The Riksbank policy rate is currently at 2.50%, and our base case is for the Riksbank to raise rates by 75bps, with a maximum rate of 3.25%, just like the ECB deposit rate. However, our bank found that the risk of raising interest rates by 100 basis points is increasing. The reasons behind this are: a) inflation in Sweden remains high (CPIF 10.2% y/y, core CPIF 8.4% y/y) and is quite sticky in the latest data; b) the Riksbank has a fairly clear interest in backing the krona (this will help fight inflation).

[Remarkable appreciation of the RMB in recent March, a large influx of foreign capital]

Since November 2022, the RMB exchange rate has performed strongly and has appreciated sharply. USD/RMB (offshore) has fallen by more than 7% from the highest of 7.37475. In the past three months, the A-share and Hong Kong stock markets have also ushered in a sharp rebound against the background of the appreciation of the renminbi, especially Hong Kong stocks. The Hang Seng Index has risen by 50% since November 1 last year. In terms of A-shares, the Shanghai Stock Exchange Index has increased by 5.68% this year, and the ChiNext Index has increased by more than 10% this year. Behind the surge, the continuous influx of foreign capital may be an important factor driving up Hong Kong stocks and A shares.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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