The below key drivers are likely to impact FX markets in December:
- News from China around the relaxation of its strict COVID-zero policy and projected reopening of its economy
- Inflation data (CPI) and central bank commentary, especially from the US Federal Reserve, as an indication of future pace of rate hike cycles
- Global energy supplies and prices, especially in Europe
Read on for insights into factors affecting the key currencies, or download as a PDF.
EUR Euro
Off the back of softer inflation data in the US, the euro was able to make a recovery against the US dollar in November, climbing above parity and nearly reaching 1.04.
Although concerns remain about possible energy shortages over the winter, so far they haven’t escalated and gas supplies remain well stocked. This has been assisted by a milder-than-usual start to the winter in Europe, however a cold snap could see energy supplies drained and economic pressures mount on the Eurozone.
The main event to watch in December will be the European Central Bank’s rate decision, due on the December 15. Recent comments from ECB President Christine Lagarde indicate the bank will announce another aggressive 75 basis point move. With the eurozone’s inflation still far above target, the November 30 reading came in at 10%, rate hikes are expected to continue into 2023.
A pivot in Fed policy would likely be the biggest opportunity for sustained euro gains against the dollar, however, the ongoing energy crisis and the broader geopolitical narrative will likely continue to create headwinds for the shared currency next year.
- The euro could range between 0.8475–0.8770 against the pound, and 1.0000-1.0600 against the US dollar.
GBP Sterling
In November, softer inflation data in the US allowed the pound to jump against the US dollar, gaining 10 cents in a month to break above the psychological level of 1.20 for the first time since August.
Markets responded positively to the new Chancellor of the Exchequer, Jeremy Hunt’s Autumn statement, where he unveiled a £55 billion worth of tax rises and spending cuts in an effort to fill the UK’s ‘fiscal black hole’. The measures included a windfall tax on energy companies, which will raise an estimated £16 billion a year alone.
Inflation continues to pose a threat to consumer spending power in the UK, with the latest reading showing an increase in CPI to 11.1% from the previous print of 10.1%. With some analysts predicting inflation has now peaked, attention will be drawn to the next reading on December 14. A cooling of inflation would be welcome news for the economy and potentially the pound.
In an effort to tame rising prices, the Bank of England are expected to announce another 50 or 75 basis point hike at its next policy decision on December 15.
After a correction from months of US dollar demand, further indications of a change in stance from the US Federal Reserve policymakers could lead to some further gains for the pound against the US dollar. However substantial gains against the euro remain unlikely as both economies are facing uncertainty over winter energy supplies and the increased cost of borrowing to combat rampant inflation.
- The pound could range between 1.1800-1.2400 against the US dollar and between 1.14-1.18 against the euro.
AUD Australian dollar
The Australian dollar extended late October gains into November, pushing north of US$0.65 and falling just shy of a move above US$0.68. The potential for a move away from China’s current COVID-zero program, coupled with a shift in market expectations for US Federal Reserve policy, helped fuel renewed demand for risk, allowing the Australian dollar to consolidate gains. The upturn has continued into December with AUD testing a break above US$0.68.
Australian dollar direction through December will likely be shaped by offshore risk events. US labor market performance and inflation remain key in shaping expectations for the pace of US interest rate hikes and US dollar strength.
The Reserve Bank of Australia hiked interest rates by 25 basis points in early December, another modest hike compared to G10 peers which can contribute to lower demand for the Australian dollar as investors chase higher yielding currencies.
China’s COVID response will continue to remain a key market focus driving the Australian dollar. While rising case numbers and new restrictions pose a threat to near-term growth, signs of a shift in outbreak management have boosted hopes authorities will abandon COVID-zero in Q2 2023. A broad reopening of the Chinese economy will offer welcome relief to global supply chains and growth prospects.
Having consolidated above US$0.66, any extension relies on further improvement in the risk narrative to which reduced US Fed policy expectations and Chinese COVID management remain key.
- The Australian dollar has likely seen the bottom in this recent downtrend, and will be looking for signals to push back towards US$0.70. Aggressive Fed rhetoric and a doubling down in China’s COVID-zero approach could pose a risk to further AUD recovery and see the currency trade below US$065.
NZD New Zealand dollar
In November, the Reserve Bank of New Zealand surprised markets by hiking rates by 75 basis points and lifting expectations for the peak of the Overnight Cash Rate. This sustained hawkish lilt from the RBNZ, at a time when other major central banks are considering slowing the pace of rate hikes, supported the New Zealand dollar, particularly against the Australian dollar.
The New Zealand dollar also benefited from an improvement in the global risk narrative, as softer US inflation data saw a correction in US rate expectations and demand for the US dollar. Additionally, hopes that China could move away from its current COVID-zero policy benefited currencies correlated with Chinese economic growth.
With no major economic data or Reserve Bank of New Zealand meeting in December, the New Zealand dollar will continue to be driven by global events.
- Having pushed above US$0.62 and tested a break above US$0.6250 further gains towards US$0.63 will likely hinge on further improvement to the risk narrative, with Chinese COVID management and Fed policy expectations continuing to be important market drivers. Erosion of risk sentiment could force the NZD back towards US$0.59 / US$0.60.
USD United States dollar
The strength of US dollar has been in decline, with the DXY index experiencing lower highs in October and November after hitting a 20-year high in September.
CPI data released in November showed US inflation pressures easing, building expectations of a slower pace of interest rate hikes which triggered losses for the US dollar. In November, it lost 8.31%, 7.71%, and 6.08% versus the New Zealand Dollar, Japanese Yen, and Australian dollar respectively.
At its November meeting the US Federal Reserve again delivered mixed messaging. The speculation for a downshift in Fed rate increases was confirmed when Chair Powell solidified expectations for a slower pace of hikes to the federal funds rate target.
Inflation and labor data will continue to be key in shaping expectations for the pace of US interest rate hikes and future demand for the US dollar. A consecutive monthly cooling of inflation in on December 13 would amplify pressure on the Fed to slow the pace of interest rate hikes, which would likely mean further softness for the dollar.
On December 14, a 50 bps increase instead of a 75 bps increase could be the number for the FOMC rate decision. Any surprises from the Fed, whether the pace of the rate hike announced or policymaker commentary, could cause currency volatility.
- The DXY could range between 103–106 in December.
CAD Canadian dollar
Both Canadian inflation and unemployment data came in lower than expected in November. The Canadian economy is showing slower activity, which is dampening expectations for more aggressive rate hikes from the Bank of Canada.
Until October, the Bank of Canada’s aggressive rate hike cycle has benefited the Canadian dollar. The overnight lending rate reached 3.75% following the October meeting however the next announcement on December 7 could see a slowdown in pace with a modest increase between 25 and 50 basis points. Should we see a slower pace from BoC and the US Federal Reserve’s projected hike of 50 basis points, this could lead to weaker demand for the CAD against the USD due to a decreased yield advantage.
After a period of sustained demand in 2022, the Canadian dollar, like the US dollar, is seeing a broad weakening which could continue into 2023. Should investor risk sentiment continue to improve with increasing optimism around the global economy due to China reopening, the Canadian dollar could make gains against a weakening US dollar, however it would likely lose strength against other major currencies.
- The Canadian dollar could trade against the US dollar between 1.33-1.37 in December.
JPY Japanese dollar
November saw overall significant gains for the yen against the US dollar. USD/JPY started the month just below 149 and ended below 139, a roughly 7% increase in value for the yen.
After US Federal Reserve Chairman Jerome Powell’s speech toward the end of November, USD/JPY fell to a fresh three month low (stronger yen) around 137.30. The move was mostly due to a recovery in risk sentiment in financial markets as well as the downbeat US Treasury bond yields.
Japan continues to lag behind G10 peers, maintaining its loose monetary policy and low interest rates. 90% of economists polled by Reuters believe that the Bank of Japan will eventually unwind their accommodative monetary policy however the majority also believe that the move won’t happen until the second half of 2023 or later. This means that despite some opportunity to regain losses against the US dollar, any significant upturn into 2023 will likely be limited.
- USD/JPY could trade between 130-142 in December.
SGD Singapore dollar
The Singapore dollar had its best session in seven years on November 11, after the release of lower-than-expected US October inflation data heightened market expectations that the US Federal Reserve could slow their aggressive pace of interest rate hikes.
However, in mid-November the SGD weakened due to a worse-than-expected export data (-5.6% actual vs -1.7% forecast). Despite this weak spot, the SGD still had its biggest monthly gain against the USD since March 2016, mainly due to further signals from US policymakers about slowing the pace of US rate hikes, as well as hopes of easing COVID control measure in China.
In December, should risk sentiment continue to improve and US yields continue getting lower, the SGD should find more support against the US dollar.
- USD/SGD could trade between 1.3400-1.4100 in December.
HKD Hong Kong dollar
In November, the Hong Kong dollar climbed to the highest level against the US dollar since October last year as local funding pressure and drying liquidity continued to push HKD higher towards the mid-point of the peg.
The funding pressure comes from the rising Hong Kong Interbank Offered Rate (Hibor). 3-month Hibor was about 50bps higher than the US equivalent rate by end of November, making it prohibitively expensive for traders to borrow HKD to buy USD. Capital flows into the Hong Kong equity market off the back of increased investor risk appetite in November also helped boost HKD strength.
In December, it is widely expected that the US will slow down its hiking pace. Should this happen, it is likely to see HKD to strengthen even more.
- USD/HKD could trade between 7.76–7.82 in December.
What China’s pivot from COVID-zero could mean for currencies. Read the article.
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