FUNDAMENTAL BREAKDOWN

26th JUNE 2023

 OVERALL REVIEW

(Previous week)
-Despite policy tightening from ECB and Fed’s hawkish hold last week, global markets
largely shrugged off the central banks’ actions. Investors’ sentiment remained buoyant,
propelling many global markets to impressive rallies. Germany’s DAX index even recorded
a new all-time high.

In the forex market, Yen took a significant hit and emerged as the week’s worst performer
by a mile. Policy divergence between BoJ and other central banks was a dominant factor
led to the Yen’s underperformance. Dollar wasn’t far behind, sliding further as the
correlation with risk sentiment seemed to invert once again. Swiss Franc, another
traditional safe-haven currency, was the third weakest performer, further underscoring
the prevailing risk-on environment.

Contrastingly, Australian Dollar outperformed, buoyed by robust domestic job data and
expectations of further monetary tightening. Commodity prices also got a boost following
China’s decision to cut rates, providing an additional lift to the Aussie. British Pound
secured the second strongest position, propelled by expectations of more rate hikes from
BoE and significant buying against European majors. Euro, despite ECB’s rate hike, lagged
behind, only ended as the third strongest for the week.

(Pairs to watch out for)

CAD (CPI)

USD (Jobless claims and PCE Data)

EUR (CPI )
 USD
(Positive)
-Recently, there has been an increase in economic data, which has led to a more hawkish
interest rates pricing. This means that the Federal Reserve is likely to raise interest rates
more than expected in response to recent strong data
-If you look at the market reaction, financial markets took the data as another robust sign
of a still-tight labor market.
-The Fed on the other hand paused its rate hiking cycle on Wednesday as widely
anticipated, but they delivered a hawkish message
-The 2023 GDP forecast was lifted to 1.1% (from 0.4%), suggesting that the outlook for
more rate hikes relies on a fairly optimistic growth assumption.
-With a stronger economic outlook and higher expected inflation, the median projection
on the future path of the policy rate was raised by 50-bps to 5.6% – suggesting a terminal
policy rate of 5.75%.

(Negative)

- -As we remain more pessimistic on the macro outlook for H2, we also think that the
projected rate hikes will not end up materializing, and stick to our previous forecast of
no rate changes by the Fed for the remainder of the year
-Overall, the greenback has been under some pressure this month, partly because of the
market’s skepticism about the Fed’s hawkish signals and partly because of the euphoric
tone in stock markets that has diminished safe-haven flows.

(Mixed / Inconclusive)
-There is a game of chicken being played between Fed officials and market participants in
recent weeks, with policymakers telegraphing another two rate increases for this year but
investors only pricing in one. As such, the persistence of inflationary pressures will decide
who is right, driving the dollar accordingly.

Conclusion:
Overall, the first rate pause in 11 meetings has now come, but the FED still provided signs
of possible further tightening in the future. For now it seems the market has taken a.
downturn as its seen this to be the first pause in the cycle, and other central banks are
continuing to hike. The way we can determine where direction will go, as there are 2 major
views at the moment, is through the inflation data coming out on Friday.
 EUR

(Positive)

-The ECB meeting yesterday was according to expectations with its 25bp rate hike and a
formal decision to end the APP reinvestments from July.

-The staff projections were revised higher for both underlying and headline inflation across
the horizon with importantly the 2025 projection at 2.2%, above the ECB’s target.

- Lagarde said that it’s ‘very likely’ to hike again in July.

-Despite mounting signs that inflation is cooling off and economic activity is stagnating, the
ECB still decided to telegraph its intentions for higher rates.

-Another blessing for the euro has been the weakness in the US dollar, and even more so
in the Japanese yen lately.

(Negative)

-This depreciation can be attributed, in part, to the Euro’s general weakness following the
latest inflation reports.
-It would take “material change” for the committee to not raise rates, with a pause not
even under consideration until now.

(Mixed / Inconclusive)

-Looking ahead, the question is whether there is still some juice left in the euro’s rally. That
might be decided by the inflation report on Friday and what it implies for the ECB’s path.

-Therefore, the euro might not be able to count on any further support from monetary
policy. It could still advance if other major currencies keep depreciating, but the rally is
unlikely to receive any more ‘fuel’ from the euro side of the equation.

Conclusion:

A nice 25bps rate hike along with hawkish comments has re-affirmed the long term view of
a hawkish ECB, which is expected to continue. Overall, EUR outperforming the currencies
with either pauses or more loose policies like BOJ. Next week we have the inflation data on
Friday which would apply more upside movement if we see higher figures so it will confirm
the hawkish views.
 GBP

(Positive)
- -Contrarily, market predictions for BoE terminal rate are being adjusted upwards to
5.50% from the previous 4.50% prediction. This alteration comes as UK inflation
struggles to decelerate at the anticipated pace, prompting a re-evaluation of BoE’s
potential response.
- -The economy has been more resilient than anticipated but inflation is much higher
than we’re seeing elsewhere and hasn’t made nearly as much progress. The risk of it
becoming embedded meaning higher rates for longer and an eventual economic slump
is rising by the week.
- -The UK CPI report has again beat estimates across the board with the CPI Y/Y coming at
8.7% vs. 8.4% expected and the Core CPI Y/Y rising to a new high at 7.1% vs. 6.8%
expected.
- -BoE’s Governor Bailey (hawk) said that they are not signalling what will come next on
rates and that they are not seeking to precipitate the economy into a recession, but it
was absolutely imperative that the BoE raised rates. As other central banks, they remain
data-dependent.

(Negative)

-As for sterling, the outlook seems cautiously negative. The UK economy might be
stabilizing but is still fragile, its inflation problem is bigger than other nations, and the BoE
is near the end of its tightening campaign. Combined with the pound’s sensitivity to the
global investment mood at a time of turbulence in the markets, it’s tough to be optimistic.

(Mixed)
-People will be hoping for some good inflation news on Tuesday but if recent months are
anything to go by, we should probably expect the worst and hope for the best. Another
bad report could pile pressure on the BoE a day later to hike by 50 basis points. It’s only
12% priced in at the moment but that could change if the CPI data is ugly once again.
-Even if the BoE gives little away about its intentions at future meetings, sterling could
benefit from a broadly positive set of data, as retail sales numbers for May are also due on
Friday, along with the flash PMIs for June.

Conclusion:

Now we had the 50bps rate hike which was a surprise to the market, the BOE have just
said they will remain data dependant so any important data to come out in the next few
weeks will be important. Howver, next week holds nothing significant
 NZD

(Positive)
-
(Negative)

-(RBNZ) largely stayed the course it set out in April but indicated cuts to the cash rate could
materialise sooner than markets imagined.
- the vote was split with some members favouring no action, and the overarching message
was that this is probably the peak for rates.
-"The forward guidance today was more dovish than expected. The RBNZ kept a fairly
neutral guidance rather than our expectation of guiding towards further hikes,"
-While the Chinese economy outperformed in Q1 after Zero-COVID measures were lifted,
momentum from the first quarter has not been able to sustain itself and growth prospects
are fading quickly.

(Mixed)
-2 key data to focus on; Business Confidence for June out on Thursday where the forecast
is calling for a slight improvement to -28 from -31.1 in May.
On Friday, Consumer Confidence for June is forecasted to dip to 77 from 79.2 recorded in
May, if it turns out as expected, it will be the lowest level since December 2022.

-Conclusion:
Not much going on with NZD at the moment so no particular bias.
 AUD

(Positive)

-Australian Dollar secured its position as the strongest currency of the week, spurred by
RBA’s unexpected 25bps rate hike to 4.10%. The central bank’s communication,
underscored by Governor Philip Lowe’s speech, has marked a distinct pivot back to tackling
inflation.

-As of 16 June, the ASX 30-day interbank cash rate futures (July 2023 contract) has priced
in a 53% chance of another 25 bps hike in the next RBA meeting to bring the cash rate to
4.35%.

-The aussie has been on a roll lately, as the RBA pivots further to the hawkish side and
Beijing steps up its efforts to stimulate the Chinese economy, which is the biggest market
for Australian exporters. Further gains could be in store for the currency if the minutes
reinforce bets for further rate hikes by the RBA and China sticks to its pledge to boost
growth.

-they reaffirmed their willingness to do what is necessary to bring inflation to target.

(Negative)
-Both Australian and New Zealand Dollars emerged as the week’s biggest losers, each
impacted to varying degrees by the increasingly pessimistic view on economy of China.
-While the Chinese economy outperformed in Q1 after Zero-COVID measures were lifted,
momentum from the first quarter has not been able to sustain itself and growth prospects
are fading quickly.

(Mixed)
-Two key data to focus on to gauge the next move on RBA’s monetary policy stance where
it has reiterated its current tightening mode on last week’s release of RBA June meeting
minutes.
On Wednesday, the monthly CPI Indicator for May is expected to come in at a slower
growth rate of 6.1% year-on-year from 6.8% in April. If it turns out as expected, it will be
the lowest level of inflation growth since March 2023.
On Thursday, preliminary retail sales for May is expected to show a growth of 0.1% month-
on-month after zero growth recorded in April.

-Conclusion:
With confirmed hawkish views by the RBA in the minutes meeting last week, AUD still sold
off, perhaps more so due to risk sentiment. No clear direction for now.
 CAD

(Positive)

- The Canadian economy enjoyed a strong rebound in GDP growth in the first quarter,
expanding by 0.8% q/q. The labour market is heating up again, while headline inflation
unexpectedly accelerated in April.
- - The hotter-than-expected GDP print, alongside earlier indications of persistent
inflation and labour market strength, signals that further action on rates by the Bank of
Canada could be in the cards.

- market expectations, however, underwent a dramatic shift over the week, transitioning
from anticipation of a 25bps rate cut by year’s end to now foreseeing an additional rate
hike of the same magnitude or potentially more.

- The loonie has advanced lately despite the decline in oil prices, mostly on the back of
hawkish signals from the Bank of Canada, so the inflation report will be crucial in
deciding the longevity of this rally.
(Negative)

-With March’s CPI data showing a slowdown in inflation to 4.3% yoy, there is currently no
significant evidence to “accumulate” to prompt BoC to reconsider tightening.
-USD/CAD pulled back as oil markets and precious metals rebounded after the recent sll-
off.

-Despite BoC surprising 25bps rate hike to 4.75%, Canadian Dollar struggled to extend gain
towards the end of the week. This hesitation in performance was largely due to
disappointing job data.

-As a final note, the BoC removed from the statement the line “remains prepared to raise
the policy rate further if needed to return inflation to the 2% target". It may be a one and
done or they just didn’t want the markets to price in another hike at the next meeting.
(Mixed)

-Finally in neighboring Canada, inflation stats for May are out on Tuesday.

Conclusion:
Although we’ve had lower oil prices, CAD has been developing up a bit due to speculation
of more hawkish intent from the BOC. For us to see if this will continue, it will all come
down to the inflation report.
 JPY
(Positive)

- (Long term it will strengthen as soon as we see confirmations of a change in monetary

policy).

- -this latest set of upbeat leading economic data has further opened the “window of
opportunity” for BoJ not to “drag its feet” to normalize its current ultra-easy monetary
policy in 2023 amid rising global interest rates.

- -The economic recovery in Japan has been picking up speed recently, adding to the
likelihood of a tightening move from the BoJ.

(Negative)
-Despite Japan experiencing higher inflation by their own standards, it is not expected that
BoJ will alter its ultra-loose monetary policy in the near future.
-Japanese Yen emerged as the worst performer following BoJ’s dovish stance, leading bond
traders to abandon hopes for any changes to yield curve control.
-Bank of Japan (BoJ) kept its yield curve control policy unchanged this morning as widely
expected. The yen weakened further on the decision, with USD/JPY trading up around
140.7 levels.
-BoJ’s Minutes showed that the current monetary easing should be maintained.
-The BoJ looks too scared of deflation as they’ve been fighting against it for decades.

(Mixed)
- As such, for the yen to stand any chance of a comeback, it would need to rely on
speculation that the Bank of Japan might adjust its policy settings next month. This puts
extra emphasis on the CPI inflation numbers for Tokyo, which will hit the markets on
Friday.

Conclusion:
With JPY weakness continuing as more and more dovish comments are being made, the
only thing that could prevent this freefall is if we get some really big upside surprises to the
inflation report but apart from that, JPY should remain weak if it continues this way.
 OTHER INFO

CHF
-The Switzerland Headline CPI came at 2.2% Y/Y and the Core measure at 1.9% Y/Y. The
SNB inflation target is just below 2%, so the central bank may pause at its June meeting
and, even if it hikes, it may be the last one for this cycle. Later in the week SNB’s Jordan’s
comments boosted the Swiss Franc as he delivered some hawkish remarks about inflation
being more persistent than they thought and that it’s not a good idea to wait for inflation
to rise and then being forced to hike even more.

-The recent inflation report showed strong progress on getting inflation below 2% (2.2% in
May) but that won’t be enough for the SNB to consider pausing on Thursday. In fact,
markets are expecting the central bank to hike by 50 basis points, taking the policy rate to
what Chairman Thomas Jordan suggested may be the neutral rate, of 2%.

-Nevertheless, the SNB doesn’t seem to think that policy is restrictive enough as it wants to
see inflation fall below 2%. Policymakers might also be worried about the fall in CPI being
temporary and considering that the SNB meets only four times a year, a 50-bps hike seems
more likely.

China
While the Chinese economy outperformed in Q1 after Zero-COVID measures were lifted,
momentum from the first quarter has not been able to sustain itself and growth prospects
are fading quickly.
SCHEDULE