Weekly Overview: A quiet week ahead after a busy one

Last week was was quite eventful in the world of finance, marked by significant moves from central banks around globe, which have implications for currencies and the broader economic landscape. Let’s break it down into simpler terms.

First off, Japan made headlines by raising its interest rate target for the first time in nearly two decades, ending a policy known as “Yield Curve Control”, and stopping purchase of ETF’s. This decision led to the JPY decreasing in value against the dollar, which neared its highest points from the past two years. Japanese officials also hinted they might intervene in the market to prevent the yen from failing too much.

Meanwhile, the Swiss National Bank (SNB) took a different path by reducing its interest rates, the first among the G10 (a group of major world economies) to do so. This move was influenced by Switzerland’s low inflation rate and sluggish economic growth. By cutting rates before other countries, Switzerland aims to avoid making its currency, CHF, too strong, which could hurt its economy.

Over in China, the People’s Bank of China allowed the value of the dollar to surpass a previously set limit against the Chinese Yuan. This indicates that the yuan might weaken further, potentially reaching new lows. It’s a significant shift, suggesting China is adjusting its strategy in response to economic pressures.

Mexico’s central bank also decided to lower interest rates, though it took a more cautious approach compared to similar moves in Brazil and Colombia. This indicates a careful balancing act by Mexico’s central bank, trying to support the economy while being mindful of various risks.

Lastly, officials from the Federal Reserve (the U.S.’s central bank) indicated they might reduce interest rates three times this year, a sign they’re trying to support economic growth. They also slightly adjusted their expectations for growth and unemployment but didn’t change their inflation target. Despite an initial drop, the dollar regained strength, suggesting it might continue to perform well in the coming days, especially with a quieter week ahead due to the Easter holiday.

In summary, central banks worldwide are making strategic moves in response to their unique economic challenges. These decisions have ripple effects on currencies, influencing the global financial landscape. For traders and financial enthusiasts, understanding these dynamics is crucial for navigating the markets effectively.

United States

In simpler terms, recent data suggests that Americans are still spending, albeit at a slower pace than before. Even though retail sales—a measure of purchases at stores, online, and restaurants—dipped by 0.5% when looking at January and February together, a broader measure of spending known as Personal Consumption Expenditures (PCE) is showing more resilience. Experts predict a 0.5% rise in PCE for February, following a modest increase in January. This indicates that while people are being more cautious with their money, they haven’t stopped spending entirely.

Interestingly, despite the pullback in shopping, there was a noticeable boost in personal income in January, helped by adjustments in social security to counteract the cost of living and a significant increase in dividend payments. However, this uptick in income is expected to slow down, with forecasts suggesting a more modest growth moving forward.

A key focus for those keeping an eye on the economy is the PCE deflator, an inflation measure that tracks how prices are changing over time. Yet, this isn’t expected to bring much in the way of surprises. Other indicators like the Consumer Price Index (CPI) and Producer Price Index (PPI) give us a good idea of what to expect, and they suggest a steady inflation rate, both for the overall economy and the core measure that excludes food and energy prices.

Turning to the currency market, the Dollar Index, which compares the U.S. dollar to a basket of other currencies, has been performing strongly. It recently hit a new monthly high and is on track to possibly surpass the peak it reached earlier in the quarter. This momentum, supported by favorable trends and technical indicators, suggests the dollar could continue to strengthen, especially as we await the next jobs report. The anticipation of another strong employment update adds to the positive outlook for the dollar, hinting at continued economic resilience in the U.S.

Eurozone

Europe is having a quiet week, partly due to a holiday that reduces activity from Wednesday through the following Monday. There are a couple of key items on the agenda, though, including surveys on business and consumer attitudes from the European Commission and data on the M3 money supply, which measures the amount of money in circulation.

The surveys are expected to show that while confidence in the industrial and services sectors isn’t dropping further, it’s not exactly rebounding either. Consumer confidence seems to have hit a plateau, not really improving since mid-last year. On the money supply front, after a period of contraction from July to November last year, there’s been a slight uptick in recent months. However, the growth rate is still low, and the signs of credit (loans and advances given by banks) picking up are weak.

The euro, Europe’s currency, has been weakening, dropping close to $1.08 before the weekend. This marks its lowest point since the beginning of March. It’s reached a critical point that could indicate further declines, based on technical analysis. The momentum indicators, tools used to predict the future direction of market prices, are pointing downwards. Moreover, a short-term moving average has dropped below a longer-term one for the first time in a month, a signal that could suggest more weakening ahead. If the euro falls below $1.08, it might quickly head towards the $1.0760 area, and potentially even lower, back to mid-February levels around $1.06.

United Kingdom

This week, there’s a spotlight on the latest figures for the UK’s Gross Domestic Product (GDP) for the fourth quarter. The initial estimates showed a slight contraction of 0.3%, following a 0.1% contraction in the third quarter. According to the Bank of England (BOE), two consecutive quarters of declining economic activity define a recession. However, BOE officials seem relatively unfazed by this technical recession, suggesting that the downturn was mild and that there are signs the UK economy is beginning to pick up again.

In currency markets, the British pound (Sterling) saw a notable rise to $1.28 amid the excitement following the Federal Open Market Committee (FOMC) meeting in the US. However, this enthusiasm didn’t last, and the pound dipped below $1.26 before the weekend. It found some support around $1.2575, which is the lowest it’s been since mid-February. The year’s lowest point was even a bit lower, at around $1.2520.

The technical indicators, which traders use to predict future movements, suggest the pound could be facing more pressure. The short-term moving average has dropped below the long-term average for the first time in a month, hinting at potential further declines. Additionally, the pound went below the lower Bollinger Band and the 200-day moving average but managed to close slightly above it. If it falls through $1.2570, we might see it drop by another half-cent or so, with a risk of descending toward $1.2465.

China

China’s upcoming report on industrial profits for January and February is drawing attention, especially given the country’s reputation as a global manufacturing powerhouse. However, this image has been challenged by a consistent decline in industrial profits, which have been dropping year-over-year every month since July 2022. This downturn is part of a longer trend that, aside from a brief recovery from October 2020 to June 2022, has seen profits falling since 2019. Interestingly, this slump in industrial profits hasn’t strongly affected China’s stock market (specifically the CSI 300 index), indicating a weak correlation between the two.

Additionally, China is set to announce its final figures for the Q4 2023 current account balance. The preliminary estimate showed a surplus of $55.2 billion, the smallest since Q1 2020, bringing last year’s total surplus to $264.2 billion, a significant drop from over $400 billion in 2022. This decrease marks a shift from a surplus of about 2.2% of GDP in 2022 to roughly 1.5% last year, with projections suggesting further declines to 1.4% this year and 1.1% next year. It’s noteworthy that China’s current account surplus is only about a third of its massive trade surplus, which was reported at $823.2 billion last year.

The Chinese yuan (CNY) has been under pressure against the dollar, with officials previously maintaining a cap at the CNY7.20 level against the dollar this year. However, this cap was breached, and the dollar rose to nearly CNY7.23, marking its most significant gain since the start of January. The yuan has depreciated in nearly all of the first quarter of 2024, except for two weeks. While it’s challenging to gauge Beijing’s tolerance for this weakening, the near-term outlook suggests the potential for the yuan to weaken further towards CNY7.25 and possibly CNY7.30. This situation underscores the complexities of China’s economic landscape, balancing industrial challenges with currency pressures amidst shifting global dynamics.

Japan

The Consumer Price Index (CPI) in Tokyo serves as a handy early indicator of Japan’s national inflation trends, much like how the US CPI and PPI hint at the PCE deflator, and the preliminary eurozone CPI forecasts the final figures. For context, Tokyo’s CPI and the national CPI in Japan both hit their peak in January 2023, with Tokyo at 4.4% and the national figure at 4.3%. By the end of last year, these rates had moderated somewhat, with Tokyo’s CPI at 2.4% and the national CPI slightly higher at 2.6%. In February, there was a slight uptick in Tokyo’s CPI to 2.6% and the national rate to 2.9%. With government subsidies for household consumption ending in April, inflation in Japan is anticipated to increase further.

The core CPI, which excludes fresh food and is the Bank of Japan’s (BOJ) focus, also shows an interesting trend. By the end of last year, Tokyo’s core CPI stood at 2.1%, while the national core was at 2.3%. February saw Tokyo’s core CPI increase to 2.5% from January’s 1.8%, expected to adjust down to 2.2% in March. The national core CPI was recorded at 2.8% in February, up from 2.0% in January. The BOJ will soon update its forecasts, currently predicting the core CPI to decrease to 2.4% in the upcoming fiscal year and further down to 1.8% in the following year, reflecting the central bank’s influence on inflation.

Japan’s upcoming reports will cover various economic indicators, including employment, retail sales, industrial production, and housing starts for February. Typically, Japanese employment figures don’t stir the market much, and insights from retail sales are often preempted by household spending data. Notably, household spending in February fell by 2.1%, marking a 6.3% year-over-year drop—the most significant decline in three years. Industrial production also saw a significant drop of 6.7% in January, attributed mainly to the effects of a New Year’s Day earthquake and a safety scandal at Daihatsu. However, recovery signs are on the horizon, with projections suggesting a near 5% increase in output for February and a 2% rise in March.

On the currency front, the US dollar’s recent rally against the Japanese yen paused, with a slight decline after reaching a new high near JPY151.85. Despite this, the dollar has mostly been on an upward trend against the yen this year, rising in all but two of the first 12 weeks. The increased volatility and hints from Japan’s Finance Minister following the BOJ’s rate hike suggest a heightened risk of market intervention. The dollar’s recent low point since the Federal Open Market Committee (FOMC) meeting was around JPY150.25. Historically, JPY152 has been a strong resistance level for the dollar against the yen in recent years. A break above this could push towards the JPY155 area, with the long-term peak reaching closer to JPY160.

Canada

After experiencing a slight contraction in the third quarter of 2024, the Canadian economy showed signs of resilience and growth in the fourth quarter, expanding by 1%. This growth comes despite a slowdown in consumer spending during the quarter. Interestingly, government spending played a significant role in this rebound, shifting from a decrease of 1.9% in Q3 to an increase of 1.2% in Q4. However, capital expenditures (Capex), which reflect investments in physical assets, declined in both quarters.

The positive growth in Q4 was also supported by an increase in exports and a decrease in imports, contributing to the overall economic expansion. As Canada releases its monthly Gross Domestic Product (GDP) figures for January, it’s anticipated that the economy grew by a modest 0.1% to 0.2%, setting an early foundation for first-quarter growth in 2024, which is expected to be around 0.5%.

In the currency market, the US dollar demonstrated resilience near the CAD1.3450 level following the Federal Open Market Committee (FOMC) meeting and made a notable rebound to almost CAD1.3590 before the weekend. The Canadian dollar’s position was also influenced by Canada’s softer-than-expected Consumer Price Index (CPI) report, which played a role in pushing the US dollar to a slight new high for the year near CAD1.3615. This peak was reached during the last few hours of the previous week’s trading. Resistance for the US dollar against the Canadian dollar seems to extend up to around CAD1.3625, with a potential push above this level targeting the CAD1.3700 area. This dynamic reflects the ongoing fluctuations in currency values influenced by economic indicators and market sentiment.

Australia

The Canadian economy showed resilience in the fourth quarter of 2024, bouncing back with a 1% expansion after a slight contraction in the previous quarter. This rebound was somewhat unexpected as consumer spending slowed down during this period. However, a significant increase in government spending, which had decreased in the third quarter, helped boost the economy. Additionally, both exports growing and imports decreasing contributed positively to this growth. Investment in capital expenditures (Capex), though, continued to fall, marking a concern for sustainable growth.

Looking ahead, early indicators for January 2024 suggest a modest start to the first quarter, with GDP expected to grow by 0.1% to 0.2%. This puts Canada on a path towards a predicted growth rate of around 0.5% for the first quarter of 2024. Currency-wise, the US dollar found some strength against the Canadian dollar following the Federal Open Market Committee (FOMC) meeting, bouncing back from lows near CAD1.3450 to approach CAD1.3590 before the weekend. A soft CPI report from Canada also played a role in pushing the US dollar to a new high for the year against the Canadian dollar, suggesting potential further resistance near CAD1.3625. Breaking past this could lead the way to CAD1.3700.

In Australia, February’s CPI report is anticipated amid a backdrop of decreasing price pressures, yet the central bank remains cautious. The inflation rate, which had peaked at 8.4% at the end of 2022, dropped to 3.4% by January, maintaining the same level into the new year. With the Reserve Bank of Australia (RBA) still focusing more on the quarterly inflation figures, the monthly CPI continues to be a critical watch point. February’s retail sales data will also be significant, especially after a sharp 2.1% drop in December was followed by a 1.1% recovery in January. Expectations lean towards a more modest increase for February.

The Australian dollar experienced volatility, initially spiking after the FOMC meeting but then retreating. It dipped to around $0.6510, maintaining a precarious position above a crucial support trendline from mid-February and early March lows. Any break below this trendline could hint at a push towards the year’s low of about $0.6450, and potentially even towards $0.6400, signaling a cautious market outlook.

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