FUNDAMENTAL BREAKDOWN

5th FEB 2023

 OVERALL REVIEW

(Previous week)
-With the help from strong economic data, Dollar struck back to end as the strongest one,
after a week full of heavy weight events. Traders might start to give up on fighting the Fed
on the topic of terminal interest rate and the timing of a cut, given the underlying
resilience of the economy. At the same time, American and European investors appear to
be optimistic that economy is going to withstand extending tightening well. FTSE even
made a new record high. The development to monitor now is whether the greenback
would have a near term decoupling from risk sentiment.
Elsewhere in the forex markets, Swiss Franc ended the second strongest, followed by Euro
and Canadian. Sterling was the worst, thanks to selloff against European majors in
particular. Australian Dollar and New Zealand Dollar came as next weakest, without much
help from risk-on sentiment. Yen was mixed, facing some pressure from rebound in
American and European benchmark yields.

(This week)

RBA rate decision (Tuesday, February 7)

The RBA was among the first major central banks to slow down the pace of its hiking. It has
raised the benchmark interest rate by 25 basis points at each of its previous 3 meetings.
Speculation was growing that the RBA would pause its hiking, but the surprise jump in CPI
to 8.4% from 7.3% suggests another 25 bp hike could be on the cards.

UK GDP (Friday, February 10)

The Bank of England’s dovish 50 basis point hike weighed on the pound, but the central
bank now thinks the economic downturn will be milder than previously expected. We will
have both the monthly and quarterly GDP prints to provide us a snapshot of the economy,
as well as construction output, industrial production and a few other economic indicators.

US UoM surveys (Friday, February 10)

The University of Michigan’s consumer sentiment and inflation expectations surveys have
been closely monitored in recent months, as investors have tried to front-run the Fed in
anticipating policy changes. The data should move the dollar, gold and stock markets
sharply if we see significant deviation from expectations.
 USD
(Positive)

- In the US, Fed hike federal funds rate target range by 25bps to 4.50-4.75% as widely
expected. While some may disagree, Chair Jerome Powell’s post-meeting press
conference was not dovish at all. He didn’t deviate from the message that rates will
peak above 5%. Additional, he deliberately noted that “If the economy performs
broadly in line with those expectations, it will not be appropriate to cut rates this year.”

- More importantly, economic data published were impressively strong, with more than
500k growth in non-farm payroll employment.

- Fed fund futures are now pricing in 82.7% chance of another 25bps hike in March,,
pretty much the same as 84.3% a week ago. But more importantly, they’re pricing in
48.2% change of another 25bps hike in May, comparing to 33.5% a week ago.

(Negative)

-Economic data has been weaker than expected since the December meeting, such as
Retail Sales and manufacturing data. In addition, inflation components have been
weaker. Average Hourly Earnings had a large drop, while the MoM CPI for December was
negative for the first time since May 2020.

-Powell said in the press conference that it’s safe to say that the disinflationary process has
started.

(Mixed / Inconclusive)

-However, the dollar will more likely be taking its cues from Fed Chair Jerome Powell who
is scheduled to speak at the Economic Club of Washington on Tuesday.

Conclusion:
Rate hike came in as expected with some mixed commentary afterwards but overall seems
as though they came in more hawkish than expected, and paired with good NFP numbers,
seems as though we might get some short term strength but again, long term its expected
for USD to eventually get weaker over the course of the year. We have Powell speaking
again and some data next week to look forward to.
 EUR

(Positive)

-ECB President Christine Lagarde dismissed market speculation that a fall in energy prices
would allow policymakers to slow the pace of monetary policy tightening.

-French and Swiss bond yields rebounded from midweek lows after European Central Bank
(ECB) Governing Council member Klaas Knot called for half-point interest rate increases at
the next two policy meetings.
-Most recently, ECB member Knot said that the central bank will hike rates by 50bps in
February and March, confirming what many have already been speculating.

-ECB “stayed the course” and hike interest rate by 50bps to 3.00% as expected. It explicitly
mentioned in the statement that the “Governing Council intends to raise interest rates by
another 50 basis points at its next monetary policy meeting in March.”

-Comments from ECB official after the meeting indicated that the rate hike in March might
not the last one. ECB continue to “outhawk” other major central banks for a while in this
phase of the cycle.

(Negative)

(Mixed / Inconclusive)

-Conclusion:

As expected, ECB came in hawkish with the 50bps and it seems as though they were the
most aggressive out of the 3 major central banks too, hence why we are continuing to see
that strength.
 GBP

(Positive)
-Bank of England (BoE) Chief Economist Huw Pill said in New York that the UK faced the
risk of persistent inflation, hinting that interest rates would probably rise again.
-U.K. November GDP registered a surprise 0.1% month-over-month gain, lowering the
likelihood that a U.K. recession occurred at the end of last year.
-The labor market also remained strong, with the unemployment rate still close to a record
low in the three months to November
-Pound bulls are inspired by expectations that the Bank of England (BoE), in contrast to the
fading activity of the Fed
-BoE also hiked by 50bps to 4.00% as expected, with two doves voted for no change.
Governor Andrew Bailey indicated that inflation may have “turned a corner”

(Negative)

-we expect the pound to be an underperformer within the G10 currencies, showing
renewed weakness through early 2023 and only a modest rebound thereafter.

-While other Fed and ECB officials have given similar message on inflation, markets
seemed to be giving more weight to Bailey’s as recession in the UK could last longer and
deeper, even if in slight extent. As indicated in BoE’s projections, interest rate might peak
at 4.50%, and there’re some speculations that it would be below that level.

-The BoE removed a key sentence in the policy statement on Thursday. It said “if” there
are more persistent price pressures then “further tightening will be required”. The line
that had previously read “it will respond forcefully” on inflation, was removed. BoE
Governor was quite dovish at the press conference.
(Mixed)

- . We will have both the monthly and quarterly GDP prints to provide us a snapshot of the
economy, as well as construction output, industrial production and a few other economic
indicators

Conclusion:
Although an aggressive rate hike of 50bps, the comments by the BOE were certainly less
hawkish, especially moving forward for the rest of the year. Seems that we can continue to
look bearish for GBP pairs unless some news or data comes out to oppose it.
 NZD

(Positive)
-China’s reopening momentum has been good news for both Australia and New Zealand.
China-Australia relations are expected to return to a healthy and stable development, with
China’s ambassador Xiao Qian recently commenting positively on China-Australia relations.
The relationship has been constructive so far.
-There is additionally China’s reopening to add to the outlook equation – something that
could lift demand for Australian exports in the coming months
(Negative)

-The effects of the rest of the global central banks much more hawkish than RBNZ.
(Mixed)

-Conclusion:
Not too much on this in terms of its own direction as it seems to be reflecting the
movements of other global central banks.
 AUD

(Positive)

-China’s reopening momentum has been good news for both Australia and New Zealand.
China-Australia relations are expected to return to a healthy and stable development, with
China’s ambassador Xiao Qian recently commenting positively on China-Australia relations.
The relationship has been constructive so far.

-Australia recently released its CPI for November at an annual rate of 7.3%, in line with
expectations but higher than the previous value of 6.9%, indicating that Australia’s
inflation level may still not have peaked.

-There is additionally China’s reopening to add to the outlook equation – something that
could lift demand for Australian exports in the coming months

(Negative)

(Mixed)

-The Reserve Bank of Australia meets on Tuesday this week at its interest rate decision
meeting.

-inflation rose dramatically in December. Markets are now looking for an interest rate
increase of 25bps.

-The RBA Statement on Monetary Policy won’t be released until Friday, but traders will be
focused on anything the Committee has to say about the end of the zero-tolerance covid
policy in China and how it expects the reopening to affect the Australian economy.

-Conclusion:

Long term, the China reopening is a very positive sign for this year. Next week we have the
RBA meeting where they're expected to hike by 25bps with hawkish statements due to the
higher inflation reading. This may give some short term positivity but if other currencies
continue their strength, like the USD, don’t expect too much strength from AUD.
 CAD

(Positive)

- It was a joyous December for job seekers, as employment surged by 104k in the month.
The barn-burner report likely swings the pendulum in favour of further action by the BoC.

-The jobs data was strong for December. Canada added 104,000 jobs in December vs an
expectation of only 8,000 jobs.

-The improved risk mood on the back of the Fed slowing down its pace of rate hikes and
China ditching all its Covid curbs has spurred an impressive rally for commodity-linked
currencies like the loonie.

(Negative)
•-Oil prices slid heavily this week, greased by demand concerns as the world’s second
largest consumer, China, struggles through its worst battle with COVID yet.
•The impact on housing demand from the newly implemented foreign buying tax should be
modest. This week also revealed that, even with BoC rate hikes, housing demand picked up
in key markets last December.
•-CPI data released last week for December showed that inflation is moving in the right
direction, with the headline print down to 6.3% YoY vs 6.8% YoY in November.
•-Bank of Canada hiked rates by 25bps and signaled a pause in its rate hike cycle last week

(Mixed)

-Friday’s employment report may therefore not attract as much attention as usual,
although it will still be watched by policymakers as Canada’s tight labour market could yet
come back to haunt those betting that the inflation problem has gone away. But unless
there are very big surprises in the data, the loonie will likely be unfazed by it.

-The BoC has not completely shut the door to further rate hikes so a large beat in the
headline employment figure or in wage growth could push the loonie to fresh highs.

Conclusion:
-Employment data out next week where if we get massive shocks, only then expect it to
have a real impact on CAD, otherwise it may be quite muted. Some improved risk
sentiment has helped the CAD this week.
 JPY

(Positive)

-Economists at Danske Bank expect USD/JPY to fall towards 125.00 in the coming months.

-As core consumer price inflation in the Tokyo area rose 4.0% year on year in December—
the fastest rate in 40 years—speculation grew that the Bank of Japan (BoJ) could revise up
its inflation forecasts and assess the viability of further monetary policy adjustments at its
next meeting (January 17–18)
-Japan’s core CPI rose 4% year on year in December, a 41-year high, as companies passed
rising costs onto consumers. Producer prices also surged over the same period.

(Negative)

-Despite all the speculations, BoJ eventually decided to keep monetary policy unchanged
last week, maintaining short term interest rate at -0.10% and the 10-year yield cap at
0.50%. Governor Haruhiko Kuroda reiterated the pledge to maintain extremely
accommodative monetary for the time being. Much volatility was seen in JGB yields, Nikkei
and Yen. However, as BoJ won’t meet again until March 8, speculations on policy move
should cool for a while.
- The yen weakened to around JPY 129.81 against the U.S. dollar, from about JPY 127.88
the prior week, on the BoJ’s commitment to its ultra-loose stance.
(Mixed)

-any indication that pay rises are accelerating in Japan would fuel speculation of a major
policy shift as soon as a new governor takes over in April.

Conclusion:

Long term im still expecting a stronger JPY, but for now, the BOJ have kept ultra low rates
so that’s why we’re seeing JPY weakness in the short term. This is still good for us as we
can get into some long term retracements once we see reasons to really be positive on JPY
 CHF

(Positive)

(Negative)
-

(Mixed)

Conclusion:

-
 OTHER INFO

CHINA

Finally may start to see its economic activity pick up:

-Hopes that domestic demand will recover in the coming months rose after Beijing
abandoned its zero-COVID policy in December and officials stepped up measures to
support the struggling property sector. Earlier in the week, China issued a large quota
for crude oil imports to prepare for an expected uptick in energy demand as infections
start to wane and economic activity returns to normal. Economists polled by Reuters
projected a swift rebound for China’s economy once infections peak and forecast 4.9%
growth this year versus an estimated growth pace of about 3% in 2022.

-Chinese activity was firmer than expected late last year, as Q4 GDP was flat quarter-
over-quarter, and December retail sales and industrial output also surprised to the
upside.

GOLD
Gold prices are consolidating leading up to the FOMC decision. Next week, the Fed is
likely to shift from a 50bp hike pace to just a quarter point rate rise, but still will say
that more could come. Gold’s outlook for the rest of the year is turning rather bullish
for some investors, but a lot of that hinges inflation steadily falling back below 3.0%.

CRYPTO
Cryptos continue to benefit from the broad risk rebound across Wall Street. The Fed is
nearing the end of its rate hiking cycle and that has helped all interest rate sensitive
assets to start the New Year. The headlines across the crypto space have not all been
doom gloom as Moody’s works on a scoring system for stablecoins, Amazon has a NFT
initiative, and as some firms successfully raise money. Bitcoin has major resistance at
the $24,000 level, so momentum traders will closely watch to see how prices behave
post-FOMC decision. Given where inflation stands, the Fed will likely remain hesitant
that a pause is imminent and lean more towards staying hawkish. If the Fed follows the
lead from the BOC and signals they are almost done with rate rises, Bitcoin could
tentatively break past $24,000.

DOLLAR DECOUPLING FROM RISK SENTIMENT

As for the Dollar index, it should be note that firstly, extended

rebound in 10-year yield would give the DXY an extra boost. But
secondly and more importantly, a near term decoupling of Dollar and
risk sentiment might be starting to emerge. The latter development is
an important one to monitor and verify in the days ahead.
 OTHER INFO

DOLLAR DECOUPLING FROM RISK SENTIMENT

As for the Dollar index, it should be note that firstly, extended

rebound in 10-year yield would give the DXY an extra boost. But
secondly and more importantly, a near term decoupling of Dollar and
risk sentiment might be starting to emerge. The latter development is
an important one to monitor and verify in the days ahead.
 SCHEDULE

Monday
•Australia: Retail Sales Final (DEC)
•Germany: Factory Orders (DEC)
•EU: Retail Sales (DEC)
•Canada: Ivey PMI s.a (JAN)

Tuesday
•Australia: Trade Balance (DEC)
•Australia: RBA Interest Rate Decision
•Germany: Industrial Production (DEC)
•UK: Halifax House Price Index (JAN)
•Canada: Trade Balance (DEC)
•US: Trade Balance (DEC)
•US: Fed Chairman Powell Speech
•Canada: BoC Governor Macklem Speech

Wednesday
•Australia: RBA Chart Pack
•Crude Inventories

Thursday
•Australia: Building Permits Final (DEC)
•Sweden: Riksbank Rate Decision
•Mexico: CPI (JAN)
•Mexico: Interest Rate Decision

Friday
•New Zealand: Business NZ PMI (JAN)
•Japan: PPI (MoM)
•Australia: RBA Statement on Monetary Policy
•China: CPI (JAN)
•UK: GDP Growth Rate Prel (Q4)
•UK: Industrial Production (DEC)
•UK: Manufacturing Production (DEC)
•UK: Trade Balance (DEC)
•Germany: CPI Prel (JAN)
•Canada: Employment Change (JAN)
•US: Michigan Consumer Sentiment Prel (FEB)