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Things We're Watching Into Year-end - Global Exchanges

FICC Podcasts Nos Balados 29 novembre 2022
FICC Podcasts Nos Balados 29 novembre 2022


Disponible en anglais seulement

In this week's episode, we home in on the 1M horizon, which now brings us to the end of calendar year 2022. We share our thoughts on the latest developments in RMB, GBP, USD, and CAD.


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About Global Exchanges

BMO’s FX Strategists, Greg Anderson and Stephen Gallo, offer perspectives from strategy, sales and trading on the foreign exchange market, related financial markets, and the global economy.

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Disponible en anglais seulement

Greg Anderson:

Hi. Welcome to episode 58 of Global Exchanges, a podcast about foreign exchange markets and related issues. In this week's episode, my co-host Stephen Gallo and I home in on the one-month horizon, which now brings us to the end of calendar year 2022. We share our thoughts on the latest developments in RMB, GBP, USD, and CAD. The title of this episode is Things We Are Watching Into Year End.

Stephen Gallo:

Hi. I'm Stephen Gallo, a London-based FX strategist. Welcome to Global Exchanges, presented by BMO Capital Markets.

Greg Anderson:

Hi. I'm Greg Anderson, a New York-based FX strategist. I'm Stephen's cohost.

Stephen Gallo:

 

In each weekly podcast, like today's, we discuss our perspectives on the global economy and the foreign exchange market. We also bring in guests from the FX industry and from related financial markets, like commodities.

Greg Anderson:

 

We strive to make this show as interactive as possible, so don't hesitate to reach out by going to bmocm.com/globalexchanges. Thanks for joining us.

Stephen Gallo:

 

Okay, welcome to Global Exchanges episode 58. It's November 29th, 2022, and to kick things off, I want to take a quick look at the BBDXY, Greg. It's nursing a 4.5% loss, give or take quarter to date. So let's talk about that loss, Greg, because some observers might opine that it has a lot to do with the Fed, but if you do a deeper analysis of the various moving parts of the foreign exchange market, it suggests the answer is a bit more complicated than that, wouldn't you say?

Greg Anderson:

 

Excellent point, Stephen. Much of the time when we get a surprise move in the US dollar, the first knee-jerk response of market participants is to blame the Fed for whatever the dollar move is. And for a lot of this year, an increasingly aggressive Fed lined up with the hard rally in the dollar, so I can see why the assumption now might be that the Fed backing off is what is responsible for the US dollar backing off.

But here's what I want to point out. Over that quarter-to-date interval that you highlighted, the MSCI World Equity index is up 9.4%. That's my first best gauge of global growth expectations in financial markets. My second best gauge is the price of copper, and it's up 6.7% quarter to date.

Meanwhile, the FFZ3 Fed funds futures contract, which would now be my best gauge for what the Fed's going to do for the duration of its tightening cycle, that contract implied a Fed funds rate of 4.26% at the end of 2023 back on September 30th. Today, it implies a Fed funds rate of 4.69%. Similarly, the two-year treasury yield has gone up from 4.28% on September 30th to, let's call it, 4.45% today. So financial markets have baked in a bit more in terms of Fed rate hikes over the past couple months, but the US dollar has sold off anyway.

Stephen Gallo:

 

Okay, Greg, so keeping you on the hot seat here, what's your story for that divergence between the dollar weakening on the one hand and shorter-term US rates pricing in a more aggressive Fed on the other?

Greg Anderson:

 

My story is that the USD is usually more about global growth expectations and risk-on risk-off than it is about Fed-on Fed-off. Admittedly, those things got really intertwined this year when the question in markets was whether the Fed would deliberately trigger a global recession. But look, I think the market's perceived probability of a severe recession over the next 12 months has gone down since the start of this quarter, and that's why equities are up, copper is up, and the dollar is down.

So now we have to go to the next question. Why is the market perceiving less severe global recession risk for 2023? And I have a thought or two on that issue, but I'm tired of the hot seat. So let me turn to you, Stephen. When I think of the global economy and which national economy is at the epicenter and will determine what happens to the rest of the world, I first think of China, so please bring us up to speed with your latest thoughts on China, its COVID-zero policy, and the outlook for Chinese growth in 2023.

Stephen Gallo:

 

Greg, on the Chinese macro situation, I honestly think most of what we've seen in terms of COVID-related headlines over the past week or so has been noise. In the bigger picture, I don't think policy makers in China have any choice but to gradually head for the exit from zero COVID, and that's what I think they're doing. Even if the next one to two months are very bumpy for China as this exit from zero COVID is engineered, that policy response combined with the monetary and fiscal policy easing already in the pipeline, I think, is a net positive for the global economy in 2023. My expectation is that we'll see most of the weakness in China's economy related to the exit from zero COVID, the overhang from the property sector malaise and the industrial sector confined to the end of Q4 and early 2023 with, Q2 looking much better for China. I think also that's the view shared by the BMO economics team, which is looking for full-year 2023 growth in China of 4.5% in real terms, about a percentage point above what they're expecting for 2023.

But going back to the title of this podcast, Things We're Watching into Year's End, we've got to be mindful of how quickly this process in China plays out. If policy makers suddenly close the floodgates in terms of their reopening speed, that will have ramifications for various asset classes. So with that still being a risk with a one- to three-month horizon, I would probably be a buyer of dollar-CNH at $7.10 or just below, and I would look to be a seller of the currency pair above $7.25. In the first half of 2023, I could easily see dollar-RNB trading back below $7.00 as things currently stand.

Greg, I want to bring you back into the picture on the issue of the oil price, and you can feed that factor into your remarks on various different things if you want to. But China's path to ending zero COVID should ultimately be a positive for various commodity prices, including oil. But since the beginning of November, we've seen oil prices come down sharply, as markets have interpreted the stop-go nature of China's COVID approach as bearish for Chinese oil demand. What do you think on this point, and how should we think about the picture for oil into year end and for next year?

Greg Anderson:

 

Stephen, you're ahead of me again. In addition to dollar-RNB, which I now think is the quiet background driver for G10 exchange rates like DAR-yen and euro-dollar, the price of oil is another key factor that I'm watching into year end. Look, a month or two ago, we had some pretty testy public interchanges between the Biden administration and Saudi Arabia's Crown Prince MBS speaking on behalf of OPEC. That kerfuffle seems to have faded post US election, and the price of oil has definitely faded too.

That's a huge relief for the Fed and for other central banks because it definitely helps the case for them going on pause in Q2 next year. I would argue that if Brent could just stay below $90 barrel, then probably, everyone can go on pause after another 50 to 100 basis points of rate hikes, because oil's contribution to year-over-year inflation numbers should be negative from March onwards.

Where China and Europe are the big net importers of oil now, I think that you're right about China's careful stop-start-stop management of getting itself through the Omicron stage of the pandemic. It's the critical factor for the price of oil, and I guess I have a hard time predicting how that's going to evolve between now and December 31st. So I would like to take a pass on giving you year-end 2022 view for the price of oil.

But I do think that for year end 2023, we will be looking at Brent crude somewhere right around $100 a barrel, and that's because I expect OPEC to steer it then in that direction. And I expect global growth to pick up, particularly in the latter half of next year.

Now, since I know you're not really going to give me a complete pass on a year-end 2022 prediction, Brent today, $83 a barrel today. I guess I give you a view that will finish this year somewhere in the high 80s, but if that's all that we get in terms of an oil price rebound, I wouldn't expect much spill through to FX other than maybe just a little bit of positive impetus to crosses like CAD-yen. So Stephen, I presume that the absence of an energy price spike thus far in the early stages of winter in Europe, it's got to be a huge relief for European currencies and maybe part of why they're so perky. But let's just dial in on sterling for now. Besides oil, what else are you watching related to the GBP-USD exchange rate?

Stephen Gallo:

 

I agree, Greg, and with natural gas storage facilities in Europe where they currently are, the effective weaker oil prices on higher beta European currencies like sterling has been magnified in terms of topside momentum. So sterling's not a bad currency to be talking about in this environment. What to watch for sterling in terms of the factors into year end? Well, in addition to energy prices, which are still linked to efforts by Moscow to choke off the supply of energy to Europe, the other factor we have to continue monitoring is the weather. In November, we had a run of pretty mild weather for most of Europe, but we're currently heading into a stretch of colder weather, which is likely to last until at least the middle of December, based on the news flow that I've been monitoring. So energy usage and storage levels are quite likely to be depleted at a faster rate than they were in November.

Then there's the economic data. Thus far, the UK has witnessed the most extreme elements of the growth inflation and fiscal shocks, and that looks like it's going to feed through to the cost and availability of credit for the private sector over the next one to three months. So as things currently stand, both the public and private sectors may have to endure a fairly high level of de-leveraging in 2023. So with a one- to three-month horizon, when we feed all this into the outlet for sterling, I would prefer to be a buyer of cable sub $1.18 as opposed to north of $1.20, provided we don't see the dollar weakness extend aggressively from this point into year end.

Although it's a little bit beyond what we're talking about today, Greg, with a three- to six-month horizon, I would argue that $1.20 isn't a bad level to be buying sterling at at this stage, and I'd probably give you a three- to six-month call for cable of $1.24, $1.25, something like that. But that's a preliminary forecast at this stage.

Greg, let's pull you back into the fold, especially since we have energy prices on our radar screen. What are the key factors we need to watch for the loonie into year end?

Greg Anderson:

 

So since we're now talking about the loonie, I'll switch up and use WTI as the oil price benchmark and would say that probably price below $75 a barrel or above $90 a barrel would be important in market moving for dollar-CAD. Inside that range, I don't think there should be all that much correlation between oil and dollar-Canada.

But the other key factor is the BOC and the Fed. We're projecting that each of those banks hikes by 50 basis points in December and then talks about doing more next year, but with the kind of open-ended non-committal language regarding how much more next year. If that's the way things turn out, then I think dollar-Canada should end the year right about $1.35 to figure. Now, if the BOC is more dovish than that and there is some risk, then maybe we might end the year 1% to 2% higher, so let's say $1.37 to figure.

I think today's bounce higher in dollar-Canada to where we're now trading, I'll call it, $1.3620. That's a bit overdone. I particularly think that CAD weakness that we're seeing on crosses like Aussie-CAD and euro-CAD today, that is overdone. So even with the risk that it's possible the BOC might only hike 25 basis points next week, I'd still be a CAD buyer today on crosses with an intended holding period running into, let's say, the week before the Christmas holiday, when liquidity in the FX market presumably starts to wane in a serious way.

Stephen Gallo:

 

Thanks for that, Greg. It makes a lot of sense, and I was just looking at the 14-day RSI in euro-CAD. And technically, at this stage where it is above $1.40, the pair does look a bit overbought too, but we'll just have to see what happens. But on that note, let's wrap up episode 58 here. Thanks for listening. Until next time, bye for now.

Greg Anderson:

 

Thanks for listening to Global Exchanges. Listen to past episodes and find transcripts at bmocm.com/globalexchanges.

Stephen Gallo:

 

We'd love to hear what you thought of today's episode. You can send us an email or reach out to us on Bloomberg. You can listen to this show and subscribe on Apple Podcasts, Spotify, or your favorite podcast provider.

Greg Anderson:

 

This show and resources are supported by our team here at BMO, including the FICC Macro Strategy Group and BMO's marketing team. This show is produced and edited by Puddle Creative.

Speaker 3:

 

The views expressed here are those of the participants and not those of BMO Capital Markets, its affiliates or subsidiaries. For full legal disclosure, visit bmocm.com/macrohorizons/legal.

Greg Anderson Chef mondial, Stratégie de change
Stephen Gallo Chef de la stratégie de change pour l’Europe

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