Dollar on the decline

The talk around the markets remains centred on the future evolution of US and European interest rates, especially as the Fed and ECB meetings are to be be held this week on Wednesday and Thursday, respectively. Such talk is generating sometimes energetic reactions on the foreign exchange market. The consensus is for a slowdown in US hikes and sustained hikes in the eurozone leading to a narrowing of the rate differential in favour of the US dollar. These expectations are putting pressure on the greenback as we begin the year, causing the euro to reach $1.0927 on Monday, the highest since April 2022. Klaas Knot, President of the Dutch central bank and member of the ECB, called for 0.50% hikes in February and March, saying that the time to back away from tapering still far away. For his colleague Olli Rehn, there are reasons for significant increases at the beginning of the year, and for Christine Lagarde, the Central Bank must do everything in its power to counter inflation in the eurozone. On the other side of the Atlantic, however, the talk is one of moderation. According to the Wall Street Journal, Federal Reserve officials are preparing to slow the pace of rate hikes. The market now expects rates to be raised by just 25 basis points next week. This anticipation is reflected in the future rates which show 4.65% for March, just 32 basis points above the current overnight rate. The June contract stood at 4.90% this morning while the September contract stood even lower at 4.83%.

The euro has also gained ground against the Swiss franc for a return to parity. Considering the paradigm shift adopted by the Swiss National Bank, which now wants to keep the franc strong to counter imported inflation, analysts are paying close attention to this development in anticipation of comments from the SNB. Most believe the parity has the potential to reach 1.0200 before the SNB acts either by intervention or by raising rates. Expectations are currently tending towards a half-point increase in March and a quarter-point increase in June to bring the interest rate on SNB deposits to 1.75% before the summer. And while the SNB holds only one monetary policy meeting per quarter, it always reserves the right to react outside the official dates if the franc slips too much. In the longer term, the future yield curve shows that rates should peak in September before falling back in the fourth quarter and next year.

China is in the middle of its week-long New Year holiday (21-28 January). The lockdown restrictions applied in December and the real estate crisis severely affected economic growth in the last three months of the year. In 2022, GDP grew by 3% – a marked slowdown from the 8.4% growth the country experienced in 2021. In another notable decline, the country’s population fell in 2022 for the first time since the early 1960s. As for the Chinese currency, while it remains stable against the euro, it has seen significant progression against the greenback, going from 6.9760 yuan for one dollar at the beginning of the year to 6.7775 today. The yuan even touched 6.6975 on 16 January, its highest point since August 2022.

In Australia, the consumer price index rose by 8.4% year-on-year against expectations of 7.7% and a previous figure of +7.3% according to this morning’s press release. These strong figures pushed the Australian dollar to a five-month high against the US dollar. The market is now expecting 0.25% rate hikes by the Reserve Bank of Australia in the next two policy meetings.

The ounce of gold continues to rise since last November. The price of the yellow metal, boosted by the weakening dollar, consolidated its position above $1,900 to reach $1,942.50, a level not seen since April last year. Year-to-date, it has gained over $130, including an 8% increase in one month.