FX Monthly Update | December 2023

Economic Outlook and Summary

November was a good month for equities and bond bulls, but not so much for the US dollar. The greenback traded steadily until the middle of the month, then fell after US inflation data was sharply weaker than expected. Those results were followed by various Fed officials pushing back against the notion that US rates would soon be reduced as the 10-year Treasury yield slid to 4.25% from 4.50%, post-CPI. Then, at the end of the month, noted hawk Fed Governor Christopher Waller switched teams and suggested that the Fed could lower rates as soon as May 2024.

The New Zealand dollar was the best performing major G-10 currency, with a gain of 5.72%. It got a helping hand at the end of the month when the Reserve Bank of New Zealand (RBNZ) left interest rates unchanged but warned that inflation was too high and could warrant further hikes.

Equity traders were overjoyed at the news and powered the S&P 500 to its best one-month gain since July 2022. Gold prices shone. XAU/USD roared higher, gaining over 6% and setting a new all-time high record. Gold benefited from the prospect of falling interest rates against a backdrop of rising geopolitical tensions.

December is a short month, as usual, and the upcoming FOMC meeting on December 13 will ensure range trading until that date. The Committee will release its latest Summary of Economic Projections (SEP), and the market is eagerly waiting to see how the dot-plot interest rate projections change from September’s result.

The European Central Bank meeting is on December 14. Analysts do not expect any surprises but anticipate President Christine Lagarde will attempt to temper enthusiasm for early rate cut

The USD and Federal Reserve

The US dollar drove the FX bus. G-10 currency price action was highly correlated to the US dollar, and the currencies moved in a binary fashion. When the US dollar was in demand, the group suffered, and when the dollar suffered, the group gained. The combination of dovish comments from Fed policymakers and a series of soft inflation readings, which fueled the bond market rally, drove the US dollar lower in the latter half of November. That trend is expected to continue in December. However, evaporating liquidity into the Christmas and year-end holidays may lead to sharp US dollar price swings. The dot-plot forecasts from the SEP will set the stage for January markets, with most expecting to see rate cuts predicted in the latter half of 2024.

The Canadian Dollar and Bank of Canada

The Canadian dollar closed out November as the second worst-performing currency, gaining just 2.30%, partly because of slumping oil prices. The Bank of Canada left interest rates unchanged at its December 6 meeting, which surprised no one, but the tone of the statement managed to raise a few eyebrows. The Bank still says it is concerned about risks to its inflation outlook but noted how economic growth has stalled and the labour market eased.

The Canadian dollar will continue to take direction from US dollar sentiment but underperform against its commodity market peers.

Oil Price

West Texas Intermediate (WTI) oil prices peaked at $81.85/barrel at the beginning of November and went downhill until touching $72.75/b in the middle of the month. Speculation that crude supply was easily outstripping demand, because of reports of rising US crude inventories and ongoing Chinese economic growth concerns, drove prices lower. That started to change when rumors abounded that OPEC and friends were planning to announce another round of production cuts when the cartel met on November 27. The ensuing rally topped out when the November 27 meeting was pushed out until November 30. OPEC announced production cuts would increase to 2.3 million barrels/day starting in January. WTI popped but then quickly dropped to its mid-month low, as traders believed increased non-OPEC production and a weak Chinese economy would more than offset OPEC’s actions.

Forecast Table

Forecast Table is for mid-market rates, and subject to change anytime.