Calm on the foreign exchange market

From a nine-month high of $1,950 per ounce on 1 February, gold has been falling steadily this month and is now trading at more than $100 below the previous peak. The precious metal is suffering as interest rate expectations rise. While at the beginning of the month the bond markets expected the Fed’s terminal rate to be around 4.8%, the consensus increased to now forecast a level of 5.3%, or nearly 50 basis points more. A rise in interest rates makes a commodity that does not generate interest such as gold less attractive.

On Monday, the United States celebrated its ‘Presidents’ Day’ and the US markets were closed. As is often the case in this case, the foreign exchange market was very quiet with little volatility on the different currency pairs. For several days, the euro/dollar has traded between 1.07 and 1.0650 and the USD/CHF around 0.9250. Against the Swiss franc, the euro remains stable but has not managed to stay above 0.99 cents for a euro. On Monday, SNB Vice Chairman Martin Schlegel said that the central bank was ‘still willing’ to be active on the foreign exchange markets in pursuit of its price stability objective. ‘If the Swiss franc depreciates we are ready to sell foreign exchange, if the Swiss franc appreciates strongly we are willing to buy foreign exchange’. The SNB is currently accommodating a strong currency to fight inflation. This factor, combined with major geopolitical uncertainties, tends to favour our national currency.

It is worth noting, however, that GBP/USD (the cable) rose to above 1.2100 on Tuesday. The pound rose in response to better-than-expected UK Purchasing Managers’ Index (PMI) results. The latter unexpectedly improved to 49.2 in February, from 47.0 the previous month. The service sector indicator in the UK is back into expansion territory, reaching 53.3, putting an end to the recession scenario and boosting the pound sterling.

Yesterday it was the turn of the US PMI to be published, and here too the figures beat expectations. Economic activity rebounded to an eight-month high in February. The composite PMI rose to 50.2 from 46.8 in the previous month and vs consensus of 47.5. This is all the more remarkable given that the index is back above the critical threshold of 50, which separates contraction from economic growth. In Germany and France, the PMI figures published also trended upwards and above the growth threshold. There are poor economic statistics, on the other hand, in Spain, where the significant increase in energy prices caused the country's trade deficit to increase by 160%. Imports rose 33.4% in 2022 to a new record of more than €457 billion.

In Japan, the central bank governor said on Tuesday that wage growth is likely to accelerate, with companies increasing wages to offset the rising cost of living for households and facing an increasing labour shortage. Speaking before Parliament, Mr Kuroda also said that the central bank will continue to look at currency market movements and their impact on the Japanese economy to guide monetary policy. Japan’s manufacturing activity contracted at the fastest pace in 30 months in February, a worrying sign for the world’s third-largest economy facing weakening demand and struggling to contain cost pressures.

Over in Oceania, the Reserve Bank of Australia, frightened by the risk of higher-than-expected inflation, gave up any idea of a pause at its February meeting and indicated that further rate hikes would be needed in the coming months. The minutes of the general policy meeting on 7 February, released on Tuesday, showed that the Board of Directors of the Reserve Bank of Australia (RBA) discussed only two options: an increase of 50 or 25 basis points. This is a marked change from the previous December meeting at which the RBA had considered not to raise rates. A series of upside surprises on inflation and wages argued for further monetary tightening. Two weeks ago, the central bank’s board of directors opted for a quarter-point increase in the key rate, bringing it to 3.35% – a new ten-year high.

As expected, the New Zealand central bank decided to raise its key rate by 50 basis points to 4.75%, the highest level in 14 years. It continues to expect the discount rate to peak at 5.5% in 2023.

Today the minutes of the FOMC meeting on 1 February will be published. As usual, analysts will pay close attention to the language used and will search for clues on forward guidance and terminal rates.