December 2022: FX Outlook
Economic Outlook and Summary
November had a hawkish bias after a series of interest rate hikes by the Reserve Bank of Australia, Reserve Bank of New Zealand, Federal Reserve, and Bank of England. The Fed’s 75 bp hike was the most important and Fed Chair Powell’s hawkish press conference remarks underpinned the US dollar and undermined the equity market.
The hawkish tone didn’t last. Many FOMC policymakers, including Vice Chair Lael Brainard, suggested the Fed would slow the pace of rate hikes, as early as the December meeting. The US dollar started to slide and equities began climbing.
The US mid-term elections dominated the media but had little impact on FX markets. The biggest impact on trading occurred following a better-than-expected US inflation report which sent the US dollar and Treasury yields tumbling and fueled a stock market rally.
Trading took a time-out in the week leading up to US Thanksgiving. November closed on a positive note sparked by reports Chinese authorities would ease covid restrictions and reopen the economy.
Traders are looking ahead to the Fed’s December 14 FOMC meeting which includes an updated Summary of Projections. A 50 bp rate hike is baked in. The European Central Bank meets December 15, and the Bank of Canada monetary policy meeting is December 7.
As is usually the case FX volumes and market activity in general will taper into the holiday season.
The USD and Federal Reserve
Mr Powell delivered a highly anticipated speech on the last day of November, dovish only because he seemingly pre-announced a 50 bp rate hike, which is a slower pace than the previous four 75 bp bumps. The only uncertainty is the where the Summary of Projections. His remarks were viewed as dovish despite the fact they were nearly identical to his post FOMC meeting press conference statement. At that time, he was deemed, hawkish.
The US dollar didn’t have a good November. Gains early in the month were erased rather dramatically due to both Powell’s dovish speech at month-end and speculation that Chinese authorities were spooked by a wave of civil unrest and will ease covid restrictions and quickly reopen the economy.
The Canadian Dollar and Bank of Canada
The Canadian dollar rallied at the start of the month following a blow-out employment report which was ten times higher than predicted. Canada gained 108,300 jobs in October compared to the consensus forecast for a gain of 10,300. The results sparked chatter that the BoC may have tapered rate hikes too soon. The report was quickly forgotten as the focus shifted to the Fed’s plans for interest rates.
The Canadian dollar closed the month with a 0.58% gain against the greenback, the smallest gain among the G-10 currencies. The poor performance was aggravated by sliding oil prices which declined steadily throughout November, until rebounding on the last three days.
The BoC is expected to hike 50 bps on December 7 and adopt a somewhat bearish bias while maintaining that policymakers are data dependent.
Opec slashed production by 2.0 million barrel/day on November1 which in actuality was only a 1.2 million b/d cut. It was a complete and utter failure. West Texas Intermediate (WTI dropped from $93.65/b to $73.65 on November 28, a 21% loss. Prices rebounded at the end of the moth, climbing to $83.31 on December 1 due to speculation the cartel will double down on production cuts.
Rumors are rampant that production cuts are in the cards and will occur effective January 1 or in February. Goldman Sachs analysts are forecasting Brent (the European benchmark crude price) will reach $110.00/b in 2023. (WTI is trading at a $8.00/b to Brent as of Dec.1.
|Bank of Montreal
Forecast Table is for mid-market rates, and subject to change anytime.