Overlay
Markets

Parky's quick take: 5 June 2023

What’s the latest with currencies and FX markets this week? Neil Parker, FX Market Strategist, shares his views.

Economies are in a less healthy place, but will central banks pause the hikes?

What did the data from last week indicate? The biggest release was the US labour market data for May, which recorded another big increase in non-farm payrolls, the latest rise of 339,000 comfortably outstripping the market consensus forecast of a 195,000 rise, and upward revisions to the last two months of data adding another 93,000 to the total. However, that strength in net payrolls growth was contrasted by weakness in the rest of the labour market figures. Average earnings growth slipped to 4.3% year-on-year from 4.4%, the unemployment rate rose to 3.7% from 3.4%, and underemployment also rose to 6.7% (prior figure was 6.6%).

Earlier in the week, the Challenger job cuts survey indicated that the pace of layoffs was increasing once again, and there are renewed signs of the housing market seeing lower demand for mortgages and house purchase. The good news from the US was that a bi-partisan agreement for the US debt ceiling was agreed, suspending the limit until 2025, when the next Presidential election will be out of the way. The deal agreed a tight limit on non-defence spending, which will be flat next year and up only 1% in 2025. It will mean spending will be around $1.5 trillion lower over a decade versus prior to the debt ceiling deal. There are no significant data or survey releases for the markets to focus on this week. 

In the UK too there are signs that the economy is in a more troubled place. Last week saw further signs that the UK housing market is in difficulty, with mortgage lending falling by almost £1.5bn, something that is rarely seen in the UK. The Nationwide house price data for May recorded a small fall in house prices in the latest month after the surprise rise in April. This suggests that despite weakness in housing demand, the housing market still has a dearth of supply to deal with. Already this week, the CIPS (Chartered Institute of Purchasing and Supply) services PMI (Purchasing Managers’ Index) for May was revised marginally higher.

The strength of services is surprising, given that recent corporate insolvencies data indicates a sharp increase in insolvencies and administrators being appointed. The only notable release for the remainder of this week is the May RICS (Royal Institution of Chartered Surveyors) house price balance. Given that we have seen the Nationwide house price data already, this is only likely to be a repeat of what is already known, and it is unlikely to suggest any improvement.

Finally, in Euroland there is industrial production data due. How much of March’s losses will be recouped by the April data? The German, Spanish and Italian figures are all due over the remainder of this week. The risk is that the rebound will be greater than markets are pricing for, which may offer the euro some much-needed assistance after a rough few weeks. 

Can the USD continue to build on recent gains?

The big question is whether the USD can build on its recent gains? The USD index has risen back above 104, with USDJPY back over ¥140, USDCNY over ¥7.10 and EURUSD trading around $1.07. The one currency that still seems to be performing solidly against the USD is the GBP, but even here gains beyond $1.26 (which has traded in recent weeks) appear to be hard to sustain. This week could be one of consolidation for the US dollar, and it will be next week, when we get the May consumer prices inflation figures and the Federal Reserve decides on interest rates, that could prove more noteworthy in terms of direction for the US dollar.

Other major central bank meetings are also due next week (Bank of England and European Central Bank). These could also prompt a significant amount of FX volatility if the outcome or the latest assessment varies from what’s expected. The Bank of England seems the most settled in terms of approving additional monetary tightening, but the UK economy is still the one set to underperform.

Will the Reserve Bank of Australia hike this week, and are we reaching the end of the road for conventional policy?

This week also sees monetary policy decisions from the RBA (Reserve Bank of Australia), the NBP (National Bank of Poland), BoC (Bank of Canada), RBoI (Reserve Bank of India) and the Peruvian central bank.
The only central bank that appears even remotely likely to be hiking interest rates is the RBA, but there are declining price pressures, monetary policy is already in restrictive territory, and wage inflation is below where the RBA expects it to peak. Another hike in Australia may feel like overkill, especially when other central banks appear to be holding off from additional tightening.
The path of conventional monetary policy tightening appears to be coming to an end, with the damage it is doing to activity far outweighing the benefits it is producing in terms of accelerating the return-to-target for inflation, in my view. 

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in The Netherlands, authorised and supervised by De Nederlandsche Bank, the European Central Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, The Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, The Netherlands. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright © NatWest Markets Plc. All rights reserved.

scroll to top