Weekly FX Market Recap: Feb. 6 – 10, 2023

Choppy price action across the FX majors as traders see-sawed between fresh commentary and developments from major central bank officials, most of which pointed to broadly higher interest rates ahead.

There were clear winners and losers, though, as GBP took the top spot among the major currencies while the EUR came in last after seeing red for most of the week.

Notable News & Economic Updates:

Turkey was hit by 7.8 magnitude earthquake and several aftershocks on Monday

Big gain in oil prices this week, likely on optimism about China’s reopening lifting oil demand forecasts from IEA and Saudi Arabia, and also possibly on the damage to the Ceyhan oil terminal in Turkey sparking supply concerns for energy commodities

Major Central Bank moves this week:

RBA hiked interest rates by 25 bps from 3.10% to 3.35% as expected

RBA Board: “… further increases in interest rates will be needed over the months ahead” in order to ensure that inflation returns to target

In a testimony on Tuesday, BOC Governor Macklem hinted at a tightening pause “to assess how well our interest rate increases are working to bring inflation down.”

Fed Chair Powell said on Tuesday that while disinflationary conditions have started, recent jobs strength data showed that the inflation fight may last ‘quite a bit of time’

Crypto exchange Kraken will “immediately” terminate its crypto staking-as-a-service platform for U.S. consumers to settle SEC claims it marketed unregistered securities.

China CPI was +2.1% y/y in January vs. a +1.8% y/y read in December; PPI saw a fall of -0.4% m/m

Government officials told Reuters on Friday that Kazuo Ueda is set to be the next governor of the Bank of Japan.

U.K. GDP data showed 0.0% growth in Q4 2022 (-0.2% q/q in Q3 2022) to avoid a technical recession; Overall, U.K. grew by 4.0% in 2022

Canada reported on Friday that they added 150K net jobs in January, well above the 15K forecast; the unemployment rate remained at 5.0% vs. a 5.1% forecast

Intermarket Weekly Recap

U.S. bond yields and the dollar were off to a roaring start early in the week, likely buoyed by the surprisingly strong NFP report last Friday. Equity indices were treading carefully then, as investors stayed wary of risk-off flows and played it safe ahead of earnings reports.

Financial market volatility spiked higher on Tuesday thanks to comments from Fed Chair Powell’s remarks on inflation and monetary policy during a Q&A session before the Economic Club of Washington.

The U.S. dollar index initially slumped while to 103.00 while equity indices popped higher on his disinflationary assessment, before making a sharp turnaround when Powell talked about the strong jobs market and its impact on their tightening plans.

The week was actually full of hawkish Fed speak as other FOMC officials such as Daly, Kashkari and Bostic echoed these upbeat view of the U.S. jobs market, citing that the central bank might need to keep raising rates. All put together, this likely shifted the market’s outlook on the terminal rate to be much higher, with the CME Fed Watch Tool showing nearly 40% of market participants betting the Fed will take the target range to 5.25% – 5.50% or above by June.

Central bank hawkishness also came into play for the Reserve Bank of Australia, as their official statement pointed to at least TWO more hikes instead of just one. ECB policymakers also joined in the hawks parade, with Nagel saying that “more significant ECB rate hikes are needed” and Knot hinting at another 0.50% hike in March.

BOE officials, on the other hand, had mixed messages in their Monetary Policy Report hearings. Although majority of MPC members sounded hawkish, Tenreyro reiterated that “where things stand right now I would see myself considering a cut.” 

Price action calmed throughout Wednesday and early Thursday, but it was during the Thursday U.S. session where volatility popped again broadly.  There doesn’t seem to be a direct news or data catalyst, so it’s possible that the rise in bond yields on the session (U.S. 2-yr yields rose to 4.50% – its highest level since November 30 – while the 10-yr rose to 3.68%) may have been the driver, evidenced by a near uniform fall in gold, equities and crypto.

Speaking of crypto, it turned out to be a very bad week for digital assets as news of U.S. regulators charging the U.S. crypto exchange Kraken with securities violations hit the wires on Thursday. This prompted Kraken to shut down its staking program in the U.S. and pay $30M to settle the charges, a situation that likely had traders speculating more crackdowns ahead for the crypto industry in the U.S.

Most Notable FX Moves

USD Pairs

On Tuesday, Fed head Powell sent dollar pairs and U.S. equities on a wild ride when he gave mixed signals in a panel discussion hosted by the Economic Club of Washington DC.

After reiterating that the disinflationary process has already started, Powell added that “it may well be the case that we have to do more” if the labor market stays extraordinarily strong. He also dashed hopes of rate cuts soon, noting that the Fed will “have to hold policy at a restrictive level for some time.”

Additional Fed Commentary this week:

FOMC official Williams says need to maintain restrictive stance for now

Fed official Waller: Not seeing signs of quick decline in economic data, prepared for “longer fight”

FOMC official Kashkari: Strong jobs environment means Fed has more work to do

On Thursday, Richmond Fed President Barkin commented on how inflation has likely peaked but remains uncertain on whether the decline is sustainable.

U.S. Dec wholesale inventories up 0.1% m/m as expected

U.S. President Biden says he no longer sees a recession happening this year or 2024

U.S. initial jobless claims rose by 13K to 196K, continuing claims up by 38K

University of Michigan U.S. Consumer Sentiment Index improved to 66.4 in February vs. 64.9 in January

JPY Pairs

Yen pairs started off with a massive weekend gap, spurred by a report by the Nikkei Times that Deputy Governor Amamiya would likely be appointed as the next BOJ head. But that speculation was quickly dropped on Friday after Government officials told Reuters that Kazuo Ueda is set to be the next governor of the Bank of Japan.

If appointed, Kazuo Ueda is  seen to potentially align the BOJ with other major central banks in terms of tightening monetary policy, an insight that was likely the catalyst for the yen’s short-term pop on Friday.

EUR Pairs

German Dec factory orders rebounded by 3.2% m/m after 4.4% decline vs. 2.1% forecast

Eurozone Sentix investor confidence index improved from -17.5 to -8.0 in Feb

Eurozone Dec retail sales slumped 2.7% m/m vs. projected 2.4% drop

German Dec industrial production tumbled 3.1% vs. estimated 0.7% dip, previous 0.4% uptick

German preliminary Jan CPI at 1.0% m/m vs. 0.9% forecast, previous 0.8% decline

ECB officials Nagel and Knot hint at more tightening moves

GBP Pairs

Halifax reports U.K. house prices stayed flat in Jan vs. projected 0.8% m/m decline

RICS: U.K. housing market suffered the most widespread price declines since Dec 2009

BOE Monetary Policy Report hearings point to further rate hikes, Tenreyro dissents

MPC member Pill: No room for complacency on inflation, but end of tightening cycle probably close

MPC member Haskel hinted at another 0.50% hike in March

U.K. GDP for December came in at -0.5% m/m vs. a 0.1% m/m gain in November

U.K. Industrial Production for December: +0.3% m/m vs. an upward revised +0.1% m/m read in November

AUD Pairs

RBA hiked interest rates by 0.25% as expected

RBA statement hinted at more rate hikes vs. previous expectations of just one more

Australia’s Dec trade surplus dipped from 13.47B AUD to 12.23B AUD on easing supply chain issues 

RBA monetary policy statement upgraded forecasts for core inflation and wage growth

CAD Pairs

Ivey PMI improved from 33.4 to 60.1 in Jan vs. 42.3 forecast

BOC Governor Macklem pointed to tightening pause as they assess impact on inflation and housing market

Crude oil returned gains midweek after EIA printed a larger inventory build of 2.4M barrels

Canadian employment change certainly surprised economists with a big +150,000 net jobs gain in January