Monthly Foreign Exchange Outlook
- Nov 01, 2024
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Monthly Foreign Exchange Outlook
DEREK HALPENNY
Head of Research, Global Markets EMEA and International Securities
Global Markets Research
Global Markets Division for EMEA
E: derek.halpenny@uk.mufg.jp
LEE HARDMAN
Senior Currency Analyst
Global Markets Research
Global Markets Division for EMEA
E: lee.hardman@uk.mufg.jp
LIN LI
Head of Global Markets Research Asia
Global Markets Research
Global Markets Division for Asia
E: lin_li@hk.mufg.jp
MICHAEL WAN
Senior Currency Analyst
Global Markets Research
Global Markets Division for Asia
E: ｍichael_wan@sg.mufg.jp
LLOYD CHAN
Senior Currency Analyst
Global Markets Research
Global Markets Division for Asia
E: lloyd_chan@sg.mufg.jp
EHSAN KHOMAN
Head of Commodities, ESG and Emerging Markets Research – EMEA
DIFC Branch – Dubai
E: ehsan.khoman@ae.mufg.jp
SOOJIN KIM
Analyst, ESG and Emerging Markets Research – EMEA
DIFC Branch – Dubai
E: soojin.kim@ae.mufg.jp
MUFG Bank, Ltd.
A member of MUFG, a global financial group
November 2024
KEY EVENTS IN THE MONTH AHEAD
1) TRUMP VS HARRIS & THE US DOLLAR
The obvious key event ahead is of course the US presidential and congressional elections on 5th November. As we laid out in the October Outlook, we estimate a possible 7-8% stronger US dollar across the forecast profile relative to the forecasts published here if Donald Trump returns to the White House for a second term. This is based on the assumptions of tariff action being taken quickly soon after Trump’s term begins. However, we do not assume an immediate hike of 60% on China and 10-20% on all other imports. Instead Trump takes a first step but crucially verbalises his intention to reach his stated tariff levels and uses this as a threat. A stronger dollar of that extent also assumes a ‘clean sweep’ that allows Trump to proceed with much of his tax cutting plans he has laid out. Given our Harris year-end forecast of 1.1200, the assumptions imply EUR/USD would fall below the 1.0500 level toward parity with a year-end estimate of 1.0400. Assuming Trump does not act repeatedly in lifting tariffs to his stated levels, we then assume there is some modest retracement of the dollar strength recorded by the end of next year, to around the 1.0800-level. Relative to the 1.1600 forecast published here under a Harris win, that still implies a 7% lower EUR/USD level if Trump wins. The yen does not weaken to the same extent in part due to the sharper depreciation ahead of the election seen in October and given the much higher probability of the MoF in Japan intervening at higher USD/JPY levels to support the yen. CNY may also perform differently given the much higher chance of the PBoC curtailing the USD/CNY moves in the aftermath of a Trump victory. We must also stress that there are numerous sub-scenarios on a Trump victory that is much harder to scenario test than a Harris victory.
2) FOMC & BOE FOLLOWING THE ELECTION
Two days after the election the FOMC will meet to deliberate on monetary policy. Of course, the context of the election could prove important and some of the October data has been strong but given the nonfarm payrolls report on 1st November we assume the FOMC will decide to lower the fed funds rate by 25bps. The BoE decision will be made earlier the same day and following the budget on 30th October it is also not a done deal that the MPC will vote to cut. The August vote to cut was 5-4 and after the front-loaded sharp increases in government spending in the budget the decision is a closer call. We assume the MPC cuts but then holds in December.
3) All EYES ON THE NPC STANDING COMMITTEE MEETING ON NOV 4-8
Following a slew of monetary and fiscal policies announced from the government since late September, we expect the government to deliver a fiscal stimulus package trillions in size including targeting the local government debt-swap program, recapitalizing big state banks and promoting consumption. Another important swing factor on USD/CNY pair could be the outcome of the US election, with one outcome pointing to continuation of Trump trades while another resulting in the unwinding of previous Trump trades.
Forecast rates against the US dollar - End-Q4 2024 to End-Q3 2025
|
Spot close 31.10.24 |
Q4 2024 |
Q1 2025 |
Q2 2025 |
Q3 2025 |
|
|
JPY |
152.43 |
150.00 |
148.00 |
146.00 |
144.00 |
|
EUR |
1.0859 |
1.1200 |
1.1400 |
1.1500 |
1.1600 |
|
GBP |
1.2872 |
1.3490 |
1.3650 |
1.3610 |
1.3650 |
|
CNY |
7.1162 |
6.9100 |
6.8800 |
6.8500 |
6.8200 |
|
AUD |
0.6559 |
0.6900 |
0.7000 |
0.7100 |
0.7300 |
|
NZD |
0.5957 |
0.6200 |
0.6400 |
0.6500 |
0.6600 |
|
CAD |
1.3933 |
1.3600 |
1.3300 |
1.3000 |
1.2900 |
|
NOK |
11.017 |
10.446 |
10.175 |
10.000 |
9.914 |
|
SEK |
10.683 |
10.179 |
10.0000 |
9.8260 |
9.7410 |
|
CHF |
0.8649 |
0.8390 |
0.8250 |
0.8260 |
0.8280 |
|
|
|
|
|
|
|
|
CZK |
23.308 |
22.680 |
22.110 |
21.740 |
21.380 |
|
HUF |
375.68 |
360.70 |
357.90 |
358.30 |
357.80 |
|
PLN |
4.0068 |
3.8390 |
3.7540 |
3.7570 |
3.7410 |
|
RON |
4.5788 |
4.4460 |
4.3950 |
4.3830 |
4.3710 |
|
RUB |
96.804 |
92.980 |
94.070 |
95.550 |
97.010 |
|
ZAR |
17.640 |
17.200 |
17.000 |
17.200 |
17.300 |
|
TRY |
34.266 |
35.250 |
37.250 |
39.250 |
40.750 |
|
|
|
|
|
|
|
|
INR |
84.080 |
83.700 |
83.500 |
83.700 |
83.900 |
|
IDR |
15695 |
15150 |
15000 |
14900 |
14800 |
|
MYR |
4.3755 |
4.1200 |
4.0800 |
4.0500 |
4.0000 |
|
PHP |
58.094 |
55.500 |
55.700 |
55.800 |
56.000 |
|
SGD |
1.3223 |
1.2900 |
1.2850 |
1.2800 |
1.2800 |
|
KRW |
1376.3 |
1300.0 |
1290.0 |
1280.0 |
1270.0 |
|
TWD |
32.010 |
31.500 |
31.200 |
30.900 |
30.600 |
|
THB |
33.830 |
32.500 |
32.300 |
32.000 |
31.500 |
|
VND |
25276 |
24400 |
24400 |
24400 |
24500 |
|
|
|
|
|
|
|
|
ARS |
989.73 |
1030.00 |
1110.00 |
1200.0 |
1500.0 |
|
BRL |
5.7891 |
5.6500 |
5.6000 |
5.5000 |
5.6000 |
|
CLP |
961.10 |
940.00 |
930.00 |
910.00 |
880.00 |
|
MXN |
20.035 |
19.400 |
19.000 |
18.700 |
18.500 |
|
|
|||||
|
Brent |
73.10 |
75.00 |
73.00 |
69.00 |
74.00 |
|
NYMEX |
69.24 |
70.00 |
68.00 |
64.00 |
69.00 |
|
SAR |
3.7555 |
3.7500 |
3.7500 |
3.7500 |
3.7500 |
|
EGP |
48.903 |
48.700 |
48.300 |
48.100 |
47.700 |
Notes: All FX rates are expressed as units of currency per US dollar bar EUR, GBP, AUD and NZD which are expressed as dollars per unit of currency. Data source spot close; Bloomberg closing rate as of 4:30pm London time, except VND which is local onshore closing rate.
US dollar
|
Spot close 31.10.24 |
Q4 2024 |
Q1 2025 |
Q2 2025 |
Q3 2025 |
|
|
USD/JPY |
152.43 |
150.00 |
148.00 |
146.00 |
144.00 |
|
EUR/USD |
1.0859 |
1.1200 |
1.1400 |
1.1500 |
1.1600 |
|
Range |
Range |
Range |
Range |
||
|
USD/JPY |
145.00-160.00 |
143.00-158.00 |
141.00-156.00 |
139.00-154.00 |
|
|
EUR/USD |
1.0600-1.1400 |
1.0700-1.1600 |
1.0800-1.1700 |
1.0900-1.1800 |
MARKET UPDATE
In October the US dollar strengthened against the euro in terms of London closing rates, from 1.1146 to 1.0859. In addition, the dollar strengthened against the yen, from 143.21 to 152.43. The FOMC did not meet in October and hence the fed funds rate remained in a range of 4.75% to 5.00%, following a 50bp cut in September. The FOMC continued with its policy of reducing its securities holdings with QT ongoing but at a reduced rate of USD 60bn per month through a reduction in UST bond holdings from USD 60bn to USD 25bn. The pace of reduction in the holdings of MBS remains at USD 35bn per month.
OUTLOOK
The US dollar on a DXY basis rebounded notably in October helped in part by some stronger incoming economic data releases and we believe to a greater degree by increased expectations of a Trump election victory on 5th November. In a little over one month, market participants have removed 100bps of Fed rate cuts from market pricing that has seen the 10-year UST bond yield surge 50bps in October. The 2s10s has steepened with equities linked positively to a Trump presidency outperforming equities linked to a Harris win. The polls have moved in favour of Trump in the swing seven key swing states but ‘538’’s polls shows Harris ahead in two and Trump ahead in five with the margin in most within 1ppt. As the same as last month, we have published FX forecasts in this publication on the assumption of a Harris win but conclude this is close to a coin-toss. If Trump wins then based on the assumption that Trump acts quickly to implement tariffs, although not immediately to 60% on China and 10-20% everywhere else but states an intention to do so, and assuming a ‘clean sweep’ and immediate plans to legislate Trump’s tax cut plans, we would assume around a 7-8% stronger US dollar than we forecast here.
32 out of 43 elections going back to 1857 resulted in clean sweeps (17 for the Republicans, 15 for the Democrats) and there is a much higher probability of a Republican clean sweep than a Democrat one. The closest to a status quo scenario is a Harris victory with a divided Congress. That would likely result in limited policies on increasing taxes getting legislated and would also mean the Fed is left alone to manage monetary policy without fear of interference from the White House. We’d expect a good portion of the dollar appreciation in October would reverse and yields would fall with the Fed better positioned to cut by more than currently priced. The payrolls report today reinforces our view of much more cuts from the Fed if Harris wins the election. Even accounting for the Boeing strike and a reasonable assumption for a weather impact, the jobs data confirmed a weakening trend.
Our published forecasts are based on a Kamala Harris win but this is such a close call. It is also based on a split Congress and hence limited notable policy changes taking place. We assume under a Harris victory that the FOMC cuts the fed funds rate by 25bps at the November and December meetings
INTEREST RATE OUTLOOK
|
Interest Rate Close |
Q4 2024 |
Q1 2025 |
Q2 2025 |
Q3 2025 |
|
|
Policy Rate |
4.83% |
4.38% |
3.88% |
3.38% |
2.88% |
|
3-Month T-Bill |
4.54% |
4.25% |
3.75% |
3.25% |
3.00% |
|
10-Year Yield |
4.28% |
4.00% |
3.88% |
4.00% |
3.88% |
* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.
We will be updating our rates forecast after the US election, as there is potential for divergent political paths. For now, a scenario framework makes the most sense until we know the next President and composition of Congress. In our recent Macro2Markets monthly (see link pg 2) we provide paths for the Fed Funds rate and longer-term US Treasury rates based on a red or blue sweep, or Trump or Harris divided government. During the lame duck session (November through inauguration day), we do not expect the Fed to deviate much from what is priced-in and expect the Fed to deliver two more cuts in 2024. Beyond that, the path for the Fed will be driven by changes to fiscal policy. In our view, a Trump win can result in the largest moves in rates, either with a sweep or divided government (given Trump’s policy on tariffs and immigration can still be implemented in either setup). In addition, we assign a larger fiscal premium (about 50bps in 10s) under a red sweep vs a blue sweep. Meanwhile, a Harris divided government is the best setup for bonds. Such gridlock likely curtails fiscal policy where the Fed will compensate by going under neutral. All told, in the short-run a lot of the fear around bond supply has likely been priced-in. It’s possible we get dip buyers on any further rise in US rates.
(George Goncalves)
US POLYMARKET 2024 BALANCE OF POWER
Source: MUFG GMR, Bloomberg, Polymarket
BLOOMBERG DXY INDEX MOM CHANGE
Source: Bloomberg, Macrobond
Japanese yen
|
Spot close 31.10.24 |
Q4 2024 |
Q1 2025 |
Q2 2025 |
Q3 2025 |
|
|
USD/JPY |
152.43 |
150.00 |
148.00 |
146.00 |
144.00 |
|
EUR/JPY |
165.52 |
168.00 |
168.70 |
167.90 |
167.00 |
|
Range |
Range |
Range |
Range |
||
|
USD/JPY |
145.00-160.00 |
143.00-158.00 |
141.00-156.00 |
139.00-154.00 |
|
|
EUR/JPY |
161.00-174.00 |
160.00-173.00 |
159.00-172.00 |
158.00-171.00 |
MARKET UPDATE
In October the yen weakened sharply versus the US dollar in terms of London closing rates from 143.21 to 152.43. In addition, the yen weakened versus the euro, moving from 159.62 to 165.52. The BoJ at its meeting in October left the monetary stance unchanged following the announcements in July when the BoJ cut the JGB monthly purchase rate by JPY 400bn per quarter, which is estimated to see purchases fall to around JPY 2.9trn by Q1 2026. The BoJ in July also raised the interest rate paid on excess reserves (the Complimentary Deposit Facility) by 15bps to 0.25%, which has lifted the unsecured overnight call rate close to that level.
OUTLOOK
We certainly under-estimated the potential for the rebound that took place in USD/JPY in October but we also did not expect the US rates market to remove 100bps of rate cuts from market pricing either. That fact alone is the primary factor that has driven USD/JPY back to these levels so quickly. The US data flow helped fuel this with the US jobs data, retail sales and to an extent the CPI data all supporting yields. Speculation on a Trump victory in the election on 5th November has also helped fuel this move and aggressive tariff action is now certainly much more priced. The move was also helped by the shift in tone from the BoJ. After the surge of the yen and the plunge in equities in July/August, the BoJ viewed the upside risks to inflation as having receded. However, the BoJ meeting at the end of October indicated a shift in tone back to a more hawkish one signalling the intent of the BoJ to hike rates given the economy continues to unfold in a manner consistent with the forecasts with only minor adjustments to GDP and inflation forecasts. July 2025 is currently when the OIS market has a full 25bp hike priced. We see the potential for a hike in December or probably more likely in January.
After victory in the LDP leadership, PM Ishiba tasted defeat pretty quickly with the snap general election on 27th October resulting in the LDP/New Komeito coalition losing its majority with a loss of 70 seats. The coalition fell 18 seats short of the required 233 seats needed for a working majority. There appear to be two possible scenarios. The LDP coalition being expanded to include the Democratic Party for the People (DPP), which won 28 seats; or secondly, the LDP coalition advancing legislation deal by deal as a minority government. One key DPP policy objective is to broaden tax-free income for part-time workers to help encourage more hours worked and help ease labour supply constraints. This seems a very plausible policy for the LDP given it already plans fiscal spending to help ease the cost of living crisis. We doubt the political uncertainty will alter the BoJ’s plans to lift rates and a deal with the DPP could actually bring forward the prospect of a rate hike.
On a Harris victory, we see limited further scope for yen selling. US yields should fall and the MoF could be more active in intervening if required and the expected broad weakening of the dollar would see USD/JPY back below the 150.00-level.
INTEREST RATE OUTLOOK
|
Interest Rate Close |
Q4 2024 |
Q1 2025 |
Q2 2025 |
Q3 2025 |
|
|
Policy Rate |
0.25% |
0.25% |
0.50% |
0.50% |
0.75% |
|
3-Month Bill |
0.02% |
0.40% |
0.60% |
0.60% |
0.80% |
|
10-Year Yield |
0.95% |
0.95% |
1.10% |
1.20% |
1.30% |
* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.
The 10-year JGB yield advanced in October along with most bond market yields globally with the US Treasury 10-year bond yield up a notable 50bps. The 10-year JGB yield closed 9bps higher at 0.95%. The depreciation of the yen will have played some role in lifting yields as well with the BoJ’s previous dovish tone shifting at the October meeting in part likely due to the weakness of the yen. That dovish tone was down to the fact that upside inflation risks have receded, the US economy is stronger and the yen is sharply weaker. The 6mth average of the annual growth rate in labour cash earnings increased to 2.5% in August, the biggest increase since 1997 which will help reinforce the BoJ’s conviction that stable positive inflation can be achieved over the long-term. The policy stance in real terms remains very loose and we believe this will encourage the BoJ to act sooner than currently expected. Inflation expectations reported in the Tankan also remain elevated with the 5-year rate at a record. In these circumstances, and assuming a Harris win and a soft landing for the US economy we see scope for the 10-year JGB yield to drift higher.
USD/JPY VS. NIKKEI 225 INDEX
Source: Bloomberg, Macrobond
USD/JPY VS. 10YR REAL YIELD SPREAD
Source: Bloomberg, Macrobond
Euro
|
Spot close 31.10.24 |
Q4 2024 |
Q1 2025 |
Q2 2025 |
Q3 2025 |
|
|
EUR/USD |
1.0859 |
1.1200 |
1.1400 |
1.1500 |
1.1600 |
|
EUR/JPY |
165.52 |
168.00 |
168.70 |
167.90 |
167.00 |
|
Range |
Range |
Range |
Range |
||
|
EUR/USD |
1.0600-1.1400 |
1.0700-1.1600 |
1.0800-1.1700 |
1.0900-1.1800 |
|
|
EUR/JPY |
161.00-174.00 |
160.00-173.00 |
159.00-172.00 |
158.00-171.00 |
MARKET UPDATE
In October the euro weakened notably versus the US dollar in terms of London closing rates, moving from 1.1146 to 1.0859. The ECB at its meeting in October cut the key policy rate by 25bps to 3.25%, the third cut after cutting by 25bps in June and September, reversing 75bps of the 450bps of rate hikes through to September last year. The ECB is running down APP securities and commenced PEPP run-off in July with about EUR 380bn of securities rolling off the balance sheet in 2024.
OUTLOOK
The euro depreciated notably in October with financial market participants increasingly pricing in a Trump election victory on 5th November. It remains a very close election to call but a Trump victory would likely see the euro-zone caught up in the trade tariff war that could follow a Trump win. When you look at data on trade from the EU, the portion of US imports from the EU as a percentage of US total imports are close to a record. The bilateral US trade deficit has widened since Trump’s first term. Germany’s goods exports to the US as a percentage of GDP is over 3% and would be most vulnerable to increased tariffs. The EUR/USD rate charted against the EZ-US 2-year swap spread shows the scope for EUR/USD to fall further on a Trump victory. With the OIS rates market now priced for only around 100bps of Fed cuts through to September 2025 we view the rates market as better priced for a Trump win and see scope under tariffs and a Red sweep for EUR/USD to fall below 1.0500. We see in general EUR/USD being around 7-8% lower under a Trump victory scenario than under the above forecasts which assume a Harris win.
The drop in EUR/USD may have been more were it not for some better economic data toward month-end. Real GDP across the euro-zone expanded by 0.4% Q/Q in Q3, double the consensus estimate. While Germany remains the ‘sick man’ of Europe, it still recorded 0.2% Q/Q GDP while Spain expanded by a strong 0.8% Q/Q and France by 0.4%. As we have stated here before, financial markets may be under-estimating the positive impact on real incomes from the sharp drop in inflation that will help support services and household consumption in general. The ECB will be encouraged by the data and will also be cautious on delivering larger rate cuts given the continued stickiness of underlying inflation. The flash estimate for October CPI showed services inflation remained at 3.9% while the headline rate rebounded back to 2.0%. The OIS curve has removed rate cuts previously priced in sympathy with the US shift but we see domestic reasons for that too. The current divergence in rate cut pricing between the ECB and the Fed certainly doesn’t point to any sharp decline in EUR/USD but of course that could change if Trump wins next week.
As mentioned above, we see quite a difference in forecast profile between a Harris and Trump victory. There are far more sub-scenarios and greater uncertainty with a Trump win with a Q3 2025 divergence potentially of 7-8%. (1.0800 for Trump).
INTEREST RATE OUTLOOK
|
Interest Rate Close |
Q4 2024 |
Q1 2025 |
Q2 2025 |
Q3 2025 |
|
|
Policy Rate |
3.25% |
3.00% |
2.50% |
2.25% |
2.00% |
|
3-Month Bill |
3.08% |
2.90% |
2.40% |
2.15% |
1.95% |
|
10-Year Yield |
2.39% |
2.30% |
2.20% |
1.90% |
2.00% |
* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.
The 10-year bund yield jumped notably in October reflecting in part the move in UST bond yields as investors increasingly price for a Trump election victory on 5th November. The German bund yield jumped 27bps in October to close at 2.39%. The data toward month-end was certainly more consistent with higher yields with inflation rebounding and service inflation remaining sticky at higher levels (3.9%). Real GDP was also stronger suggesting upside risks to the ECB’s growth projection. But the outlook could be notably different depending on who wins the US election. A Harris win will open up the potential for more rate cuts but see 10-year bund yields decline. While Trump tariffs would be bad for growth, retaliation by the EU to tariffs by the US would increase the risks of a stagflation period that may leave the ECB reluctant to cut due to inflation fears. We would certainly expect higher volatility in euro-zone yields under a Trump win but also for yields to be higher than the levels published above, which reflect the assumption of a Harris win. We assume the 10-year yield could be roughly 40bps higher under a Trump victory scenario.
GERMANY EXPORTS TO THE US (EUR)
Source: Bloomberg, Macrobond
EURO AREA GDP CHANGE YOY, % VS. EURO AREA COMPOSITE PMI
Source: Bloomberg, Macrobond
Pound Sterling
|
Spot close 31.10.24 |
Q4 2024 |
Q1 2025 |
Q2 2025 |
Q3 2025 |
|
|
EUR/GBP |
0.8436 |
0.8300 |
0.8350 |
0.8450 |
0.8500 |
|
GBP/USD |
1.2872 |
1.3490 |
1.3650 |
1.3610 |
1.3650 |
|
GBP/JPY |
196.21 |
202.40 |
202.10 |
198.70 |
196.50 |
|
Range |
Range |
Range |
Range |
||
|
GBP/USD |
1.2650-1.3600 |
1.2800-1.3800 |
1.2900-1.3900 |
1.3000-1.4000 |
MARKET UPDATE
In October the pound weakened against the US dollar in terms of London closing rates from 1.3406 to 1.2872. The pound weakened against the euro from 0.8314 to 0.8436. The MPC did not meet in October and hence the key policy rate was unchanged at 5.00%, following the 25bp cut in August, the first after 14 consecutive rate increases through to August last year.
OUTLOOK
The pound weakened against the US dollar like all other G10 currencies as investors become more convinced of a Trump election victory on 5th November. The pound did also weaken versus the euro pointing to UK-specific factors weighing on the pound. The sustained negative news related to tax hikes in the budget may have played a role with some survey data (GfK Consumer Confidence) showing increased pessimism over the outlook. The budget has now been delivered and certainly did include huge tax hikes – a record GBP 40bn which combined with borrowing will help fund a GBP 70bn increase in government spending. Government spending in real terms will increase 4.1% this year, 3.1% next year and then drop sharply to 1.3%. The change in the definition of debt for the fiscal rule means the government capacity to borrow for capital investment has increased notably and this results in an average capex spend of GBP 20bn per year. This is good news in terms of expanding the potential growth rate, however, the OBR assumes the benefits will only materialise from 2032-33 onwards. The budget deficit is set to fall from 4.5% this year to 2.0% by 2029-30. While the figures in this budget are significant we would argue that at least now the outlook is more credible given the unrealistic real terms spending cuts under the previous budget from the last government have now been removed.
As a result, the OBR raised its inflation forecast for next year from 1.5% to 2.6% although the net impact from the budget itself was put at 0.4ppt. The estimated Gilt issuance increased from GBP 278bn to GBP 300bn, around GBP 7bn more than a Bloomberg consensus before the budget. These changes have resulted in yields moving higher although from the closing level the day before the budget, the 10-year yield increased a relatively modest 13bps by the close the day after the budget. We continue to expect the BoE to cut rates on 7th November but we have now dropped our call of back-to-back cuts, expecting the BoE to hold off in December. The BoE could well interpret the OBR’s view of the inflationary impact of the employers’ increase in national insurance tax differently. The OBR assumes much of this is passed on to the consumer in higher prices but the BoE could make an assumption of more of the increase being pass on via lower wages or hours worked. We are maintaining our view of a November cut but with a lower level of confidence.
The majority of UK exports to the US is in services which should mean GBP weakens by less vs USD than other G10 currencies. On a Harris win we assume GBP/USD rebounds as US yields decline relative to UK yields.
INTEREST RATE OUTLOOK
|
Interest Rate Close |
Q4 2024 |
Q1 2025 |
Q2 2025 |
Q3 2025 |
|
|
Policy Rate |
5.00% |
4.75% |
4.25% |
3.75% |
3.50% |
|
3-Month Bill |
4.84% |
4.60% |
4.05% |
3.50% |
3.35% |
|
10-Year Yield |
4.45% |
4.30% |
4.10% |
3.90% |
3.80% |
* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.
The 10-year Gilt yield jumped notably in October, in part on the move higher in UST bond yields as investors increasingly price in the prospect of a Trump election victory on 5th November. The 10-year UST bond yield jumped 50bps in October while the 10-year Gilt yield jumped 45bps to close at 4.45%. The budget announced on 30th October certainly confirmed a significant shift in strategy by the new Labour government with overall borrowing over the course of the forecast period to 2029-30 increasing by GBP 142bn. Gilt issuance in the current year is set to increase from GBP 278bn to GBP 300bn which certainly contributed to move higher in yields in October. From a low of 4.20% on the day of the budget the 10-year jumped 25bps by month-end. Key for Gilts will be how much the budget potentially boosts economic growth and inflation. Progress on achieving price stability is being made with wage growth slowing and the annual CPI rate falling more than expected in September to 1.7%. BoE Governor Bailey did hint at the potential for a pick-up in the pace of easing given inflation is falling faster and if that materialises it should allow for yields to stabilise at these higher levels and then move gradually lower
GBP/USD VS. UK 10YR GILTS
Source: Bloomberg, Macrobond
HOUSEHOLD EXPENDITURE VS. CONSUMER CONFIDENCE
Source: Bloomberg, Macrobond
Chinese renminbi
|
Spot close 31.10.24 |
Q4 2024 |
Q1 2025 |
Q2 2025 |
Q3 2025 |
|
|
USD/CNY |
7.1162 |
6.9100 |
6.8800 |
6.8500 |
6.8200 |
|
USD/HKD |
7.7743 |
7.7800 |
7.7750 |
7.7700 |
7.7600 |
|
Range |
Range |
Range |
Range |
||
|
USD/CNY |
6.8000-7.2700 |
6.7000-7.1500 |
6.6500-7.1000 |
6.6000-7.0500 |
|
|
USD/HKD |
7.7500-7.8200 |
7.7400-7.8100 |
7.7400-7.8100 |
7.7300-7.8000 |
MARKET UPDATE
In October, USD/CNY increased from 7.0176 to 7.1162. On October 21st the PBoC lowered the 1Y and 5Y LPR by 25bps to 3.10% and 3.60% respectively, a follow-up from the PBoC’s announcement on September 24th to lower these interest rates. Prior to that, the PBoC had lowered the 7-day reverse repo rate (by 20bps to 1.50%) and 1Y MLF (by 30bps to 2%) as well as delivering a 50bps cut on RRR in late September. Speaking at the Financial Street Forum in Beijing on October 18th Governor Pan mentioned again the possibility of another 25bps-50bps RRR cut by year-end depending on the liquidity condition.
OUTLOOK
The release of China’s 3Q GDP and September’s monthly economic data offer an early sign that the economy may have started to recover. While 3Q GDP growth slowed from the previous quarter by 0.1ppts to 4.6%yoy, the sequential growth accelerated by 0.4ppts to 0.9%qoq. Also, September’s data shows improvement in growth across major indicators such as retail sales, FAI and IP. In particular, the growth improvement in retail sales accelerated by 1.1ppts, supported by the surge in household electric & video appliance growth (by 17.1ppts to 20.5%yoy) and automobile retail sales growth (by 7.7ppts to 0.4%yoy). These suggest that the consumer goods trade-in program is working. That said, the data shows that the housing sector was still weak and a weaker exports growth partly dragged by slowing global demand. The economy remained deflationary in Q3 suggested by a negative GDP deflator (-0.6%yoy) due to continued weak consumption.
Looking ahead, we expect the positives in September data to continue in October, suggested by the improved readings of official composite PMI in October (50.8 vs 50.4 in September). On the policy front, a boost to investor sentiment on China and growth from government policy measures are likely with the market waiting for the outcome of the NPC Standing Committee meeting (Nov 4-8). A reported potential CNY10tn fiscal stimulus (according to the source of “experts”) by Reuters on October 29th did not seem to impress the market, implied by the limited reaction from CNY and CSI 300 index. The outcome of the US election can play an important role as well. Case 1: Should Harris be elected, unwinding of Trump trades will happen, which will strengthen CNY sharply along with the help of China’s fiscal stimulus (our current base case scenario). Case 2: Should Trump win, Trump trades will continue and lift USD/CNY higher heading into year end. For a longer-term impact of Trump’s win in 2025, the experience from the first trade war tells us that the market still needs to see the actual tariff policy announcement before it fully prices in the impact for such a highly uncertain and external shock. Given that tariffs will be used as a strategic tool for Trump for negotiations, we could see a series of tariff announcements in 2025 starting as quick as January. We expect a total 10% CNY depreciation from current level, to happen from now to the end of 2025.
INTEREST RATE OUTLOOK
|
Interest Rate Close |
Q4 2024 |
Q1 2025 |
Q2 2025 |
Q3 2025 |
|
|
LPR 1Y |
3.10% |
2.90% |
2.90% |
2.90% |
2.90% |
|
MLF 1Y |
2.00% |
1.70% |
1.70% |
1.70% |
1.70% |
|
7-Day Repo Rate |
1.50% |
1.30% |
1.30% |
1.30% |
1.30% |
|
10-Year Yield |
2.15% |
2.20% |
2.30% |
2.35% |
2.40% |
* Interest rate assumptions incorporated into MUFG foreign exchange forecasts.
On October 28th the PBoC expanded its monetary policy toolkit through introducing outright reverse repos, which aims to “maintain a reasonable abundance of liquidity” in the system. The PBoC plans to conduct outright reverse repos with primary dealers once per month, with tenors less than a year. The eligible securities include CGBs, LGBs, financial bonds and corporates debts. Importantly, the outright reverse repo would enrich PBoC’s short-term liquidity tools by filling in the tenor between 1 month to 12 months, as the tools currently mainly cover 7-day tenor (reverse repo) and 1Y-tenor (MLF). In fact, there are already signs of bank funding stress as the 3M and 1Y NCD yields sold by Chinese banks rose since the 7-day reverse repo cut in late September, which could be attributed to the banking outflow from wealth management products and saving deposits. Furthermore, government bonds obtained through outright reverse repo would also provide PBoC a higher degree of freedom to conduct bonds purchase and sales operation. Looking ahead, we expect PBoC to deliver rates cut by year-end but the supply pressure from a potential fiscal expansion would offset that downside impact on 10y CGB yield (reach 2.2% in Q4).
CNY ONLY DEPRECIATED MILDLY AGAINST A STRONGER US DOLLAR IN OCT
Source: CEIC, MUFG GMR
3M AND 1Y NCD YIELDS ROSE AFTER 7-DAY REVERSE REPO CUT IN SEP
Source: CEIC, MUFG GMR