Weekly FX Market Recap: Apr. 10 – 14, 2023

Despite a fresh round of top tier catalysts on the calendar and traders coming back from holiday, market volatility was relatively subdued once again.

Overall, it looks like traders were broadly leaning risk-on this week as inflation metrics and central bank speak point to lower probabilities of higher interest rates ahead.

Notable News & Economic Updates:

Risk-on Arguments

Risk-off Arguments

U.S. Treasury Secretary Yellen said that she’s “not anticipating a downturn in the economy” despite concerns over global banking, Russia’s war against Ukraine, and a recession. U.S. headline CPI slowed from 0.4% m/m in February to 0.1% in March, falling short of estimates at 0.2% and bringing the year-over-year rate down from 6.0% to 5.0% OPEC is predicting a 2.3% (2.3 million barrels per day) demand increase in 2023. New Zealand Finance Minister Grant Robertson: We might have a recession “but it will be a shallow one.” Australian economy added 53K jobs in March vs. estimated 20.8K gain and previous 63.6K increase, keeping jobless rate steady at 3.5% instead of rising to 3.6% consensus BOC kept interest rates on hold at 4.50% as expected for second straight month, citing expectations that inflation and growth will slow down U.S. headline producer prices fell by 0.5% m/m in March while core PPI dipped by 0.1%. New BOJ Gov. Kazuo Ueda said he told his G20 counterparts that he intends to keep policy ultra-loose as he’s expecting inflation to dip back below the 2% target in the latter half of the fiscal year.

Over the weekend, China conducted simulated airstrikes against key targets on and around Taiwan. The IMF slightly downgraded its 2023 and 2024 forecasts. It also sees global growth at 3% five years from now, the lowest medium-term forecast since 1990. U.K. economic growth stagnated in February vs. estimated 0.1% expansion and previous 0.4% growth figure, as declines in services and production were offset by growth in construction Australia’s strong jobs data and BOC’s rejection of rate cut speculations highlights the possibility of major central banks keeping interest rates high after pausing their rate hikes.

Intermarket Weekly Recap

The new week started with most of the major Asian and European markets out on bank holidays.  And with no surprise catalysts on the session, it appeared that the traders who were around were free to price in more tightening expectations of the Fed following last Friday’s better-than-expected U.S. employment situation update..

The prospect of higher Fed interest rates pushed U.S. bond yields and the U.S. Dollar higher and weighed on alternative safe havens like gold and the Japanese yen.  Meanwhile, Bitcoin’s (BTC/USD) technical breakout above the $28K resistance over the weekend seems to have inspired a trip to the $30K handle by Tuesday’s Asia session.

Most traders returned from holiday on Tuesday and they didn’t hesitate to go with the risk-on vibes. It’s possible too that some traders took China’s weaker-than-expected CPI and PPI data as a signal of lower-than-expected inflation reads ahead this week from other countries, especially the U.S. who also had their highly anticipated CPI and PPI updates coming soon.

This may have been characterized by the broad move lower in bond yields and the Greenback, while gold, bitcoin, oil, and equities spent most of the session in the green.

The plot thickened and the buying and selling quickened on Wednesday after the U.S. published its much awaited CPI reports. Data showed U.S. headline inflation coming in at 5.0% y/y in March. That’s lower than the 5.1% expected uptick and waaay lower than February’s 6.0% growth!

This was soon followed by the latest FOMC meeting minutes printed, which revealed that Fed members considered pausing its rate hikes in March due to the banking sector jitters. Not only that, but they expect a “mild recession” some time this year.

The Fed’s sudden cautiousness and the deceleration in consumer price increases sealed the deal for those who are betting on the Fed pausing (or even reversing) its monetary tightening plans.

Crude oil price action was notable as it got an extra boost higher on Wednesday after the latest weekly API report showed U.S. crude oil stockpiles contracting by 1.4 million barrels for the week ending April 7.

The pro-risk, anti-USD trend extended to Thursday when a softer-than-expected U.S. PPI report hit the wires, along with an uptick in the weekly initial jobless claims numbers, reinforcing the narrative of the Fed ditching its aggressive tightening plan.

On Friday, trading across the major assets was relatively quiet, but did pick up in volatility with the latest read on U.S. retail sales, which came in below expectations.

The interpretation wasn’t super clear as bond yields and the U.S. dollar jumped after the data, while gold, crypto and equities shifted lower after the release. Possibly a pure risk-off play with the Greenback as the main beneficiary? It’s possible that this reaction was more of a profit-taking move with traders buying back the severely beaten Greenback in mass and selling risk assets ahead of the weekend.

FX Recaps

In forex land, the two big winners of the week was the Swiss franc and the Canadian dollar. The former likely benefited from not only U.S. dollar weakness this week, but also a continuation of fading banking crisis fears that weighed heavily on the franc in March. The loonie likely benefited from the broad risk-on lean across the majors  as well as gains in oil prices.

The biggest loser title goes to the Japanese yen, which was quickly knocked lower across the board at the beginning of the week. This reaction came after new BOJ Governor Ueda told his G20 counterparts that he intends to keep policy ultra-loose, eventually leading to more losses as the week rolled on to improving risk sentiment conditions.

USD Pairs

Bullish Headline Arguments

Bearish Headline Arguments

NFIB Small Business Optimism Index fell to 90.1 in March vs.90.9 in February; 24% of business owners cited inflation as their most important issue

Although inflation has a ways to go to reach the US central bank’s 2% target, according to San Francisco Fed President Daly, the economy may be able to slow down effectively on its own to reach that without more policy actions.

U.S. headline CPI slowed from 0.4% m/m in February to 0.1% in March, falling short of estimates at 0.2% and bringing the year-over-year rate down from 6.0% to 5.0%

FOMC minutes indicated that policymakers considered keeping interest rates unchanged in March meeting due to banking sector jitters.

U.S. headline producer prices fell by 0.5% m/m in March while core PPI dipped by 0.1%. Annual prices fell 2.7% y/y, its smallest gain in two years, and supported the price deceleration seen in this week’s CPI data.

U.S. initial jobless claims rose by 11K to 239K in the week ended April 8. California – the epicenter of recent tech layoffs – accounted for more than a third of the increase.

U.S. Retail Sales for March: -1.0% m/m (-0.4% m/m forecast) vs. -0.2% m/m previous; Core Retail Sales at -0.8% m/m (-0.4% m/m forecast)

GBP Pairs

Bullish Headline Arguments

BOE Governor Bailey played down banking system risks on Wednesday, upping the probability more interest rate increases may be ahead to combat high inflation conditions in the U.K.

Bank of England Credit Conditions Survey for Q1 2023 showed little to no signs of a potential wider credit crunch after recent stresses to the global banking system; British lenders likely to slow supply of new mortgages in the quarter ahead

Bearish Headline Arguments

U.K. GDP for February: 0.0% m/m (+0.1% m/m forecast) vs. 0.4% m/m previous

U.K. industrial production dipped -0.2% m/m in February vs. estimated 0.2% uptick, January figured to show -0.5% decline from an initially reported -0.3% reduction forecast

EUR Pairs

Bullish Headline Arguments

Sentix Investor Confidence Index for April: -8.7 vs. -11.1 previous

According to Francois Villeroy de Galhau, the head of the French central bank, the euro zone inflation is in danger of rising above 2%, thus the ECB will continue to combat excessive price growth even as its policy response changes.

Germany CPI for March: +0.8% m/m vs. +0.8% m/m forecast/previous; +7.4% y/y  

Euro area Industrial Production for February: +1.5% m/m; +1.4% m/m in the EU

Belgian policymaker Pierre Wunsch said on Friday that ECB should accelerate the trimming of its balance sheet and ought to stop reinvesting cash from matured debt 

Bearish Headline Arguments

Eurozone Retail Sales for February: -0.8% m/m (-0.5% m/m forecast) vs. +0.8% m/m previous

Germany’s wholesale price index up by 2.0% y/y in March, down from February’s 8.9% annual growth and the slowest since January 2021

Germany’s wholesale price index up by 2.0% y/y in March, down from February’s 8.9% annual growth and the slowest since January 2021

CHF Pairs

Bullish Headline Arguments

Swiss parliament’s lower house rejects Credit Suisse rescue package. The vote is mostly symbolic, however, as the state has committed the funds and lawmakers cannot overturn that decision.

Bearish Headline Arguments

Switzerland’s producer and import prices rose by 2.1% y/y in March, the lowest reading since April 2021, as both import and producer prices eased.

CAD Pairs

Bullish Headline Arguments

BOC Governor Macklem dashed hopes for interest rate cuts in the near-term, explaining that it doesn’t look like the most likely scenario for now

Bearish Headline Arguments

The Bank of Canada kept its main interest rate unchanged at 4.50%; expects inflation to decelerate aggressively to around 3% by mid-2023 (previous forecasted 5.2% in February)

Canada manufacturing sales for February: -3.6% m/m (-2.8% m/m forecast) vs. 4.5% m/m previous

AUD Pairs

Bullish Headline Arguments

Australia’s Westpac consumer sentiment index improved from 0.0% to 9.4% in April, as confidence ticked higher after RBA’s decision to pause rate hikes

Australian economy added 53K jobs in March vs. estimated 20.8K gain and previous 63.6K increase, keeping jobless rate steady at 3.5% instead of rising to 3.6% consensus

NZD Pairs

Bullish Headline Arguments

New Zealand’s credit card spending improved from -0.1% to 0.7% m/m in March

New Zealand Finance Minister Grant Robertson: We might have a recession “but it will be a shallow one.”

New Zealand visitor arrivals tick 0.6% m/m higher in February after plummeting by 26.3% in January

Bearish Headline Arguments

BusinessNZ manufacturing index fell into contraction, printing at 48.1 in March after a 51.7 February reading.

JPY Pairs

Bullish Headline Arguments

Japan’s consumer confidence index improved from 31.1 to 33.3 in March, the highest reading since May 2022, as the economy recovered further from pandemic disruptions.

BOJ Governor Ueda suggests that a small interest rate hike might not be a big issue for financial markets but Japanese economy is not yet in that position for tightening

Bearish Headline Arguments

Japan’s core machinery orders fell by 4.5% m/m in February after a 9.8% jump in January

Japan’s producer prices up by 7.2% y/y in March, smaller than February’s 8.3% increase, as energy cost inflation slowed.

Japan’s bank lending up by 3.0% y/y in March, lower than February’s 3.3% uptick but higher than the expected 1.8% increase.

BOJ Governor Ueda in G7 meeting reiterated that inflation is likely to slow, so it would be appropriate to maintain easy monetary policy for now until target is reached stably and sustainably

New BOJ Gov. Kazuo Ueda said he told his G20 counterparts that he intends to keep policy ultra-loose as he’s expecting inflation to dip back below the 2% target in the latter half of the fiscal year.