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Blink Traders

Welcome to Blink December is normally a weak month for the dollar. January and February are typically much better months. Thus for dollar bulls like ourselves, December is proving a month of damage limitation Dollar price action is still soft Any whiff of softer price data – e.g. yesterday’s downward revision to US 3Q unit labour cost data – sees the dollar easily slip. Dollar gains remain hard to come by. Beyond today’s US initial claims (remaining remarkably low in the 220-240,000 region) will be November PPI data tomorrow (core expected to fall to 5.9% year-on-year from 6.7%) and then an incredibly busy week into Tuesday’s CPI release and Wednesday’s FOMC meeting. Preventing an even large dollar correction this month is the fact that Fed expectations have not yet crumbled. The terminal rate is still priced above 4.90% for next spring and this is just about keeping US two-year Treasury yields above the 4.25% area. Short-end yields holding up here and the ongoing inversion of the US curve is key to our call that the dollar can hold gains/bounce back into 1Q23. Clearly, next week’s FOMC meeting will have a big say here – we will publish our FOMC preview shortly. DXY looks like it will continue to trade on a soft footing near 105.00, but should meet demand below there. ECB focus moves onto QT EUR/USD remains reasonably supported near 1.05 – helped largely by the dollar’s soft performance across the board. We may be reading too much into it, but the pricing through the OIS market for next week’s European Central Bank rate meeting yesterday edged up to a 67bp hike from 54bp a day earlier. The move may be a function of some more hawkish remarks from ECB Chief Economist Philip Lane and seems to be putting the risk of a 75bp hike back on the agenda. Our house call is for 50bp. “Our base case view assumes that this EUR/USD corrective rally stalls in the 1.05/1.06 area this month. The bigger risk of a rally probably comes more from a less hawkish Fed than a more hawkish ECB. Equally, we do see European gas prices edging higher again as a cold snap hits northern Europe. TTF natural gas prices are now back up to EUR150/MWH from 100 earlier this month,” ING analysts said. “This will again pressure the trade balance and higher gas prices are one of the key reasons we are not more bullish on EUR/USD next year. Expect another narrow EUR/USD range today centered around 1.05. The data calendar is quite light and ECB speakers are President Christine Lagarde at 1300CET, Pablo De Cos at 1315CET and Francois Villeroy at 17CET – all seen on the dovish end of the spectrum.” What’s moving market today Elsewhere, we have the Swiss National Bank’s Andrea Maechler speaking at 1530CET. In addition to Fed, ECB and Bank of England rate meetings next week we also have the quarterly SNB policy decision. It looks like market pricing is split between a 25bp and 50bp hike (taking rates to 0.75-1.00%). Let’s see what she has to say today. EUR/CHF has been a bit stronger than we had expected, but assuming the SNB stays hawkish, we continue to see downside risks here.

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The Eurozone services PMI edged down to 48.6 points, S&P Global data showed on Friday, whereas the composite fell more – to 47.3 – dragged down by gloomy manufacturing. While Italy’s services PMI also declined to 46.4, leaving the composite down to 45.8. In Spain the services PMI rose to 49.7, but the composite fell to 48. Today’s Eurozone data were slightly better-than-expected, as German and French PMIs were revised up from the flash. But this does not make the outlook rosier. GDP doesn’t limit worries on the Eurozone economy Indeed, while GDP surprised to the upside in Q3, high-frequency data suggest that the eurozone is headed for a recession this winter. Amid elevated inflation denting purchasing power and high energy and production costs dampening manufacturing. Italy among the worst in the euro area In Italy, service firms lamented lower orders and demand due to high prices and uncertainty. As a result, expectations were at a nearly two-year low. While higher costs were passed on to clients, the ability to do so was limited by the weakness of demand and by competitive pressures. Despite the improvement in the headline number, the details of the Spanish services survey are not encouraging either; future prospects remain gloomy, amid high uncertainty and price pressures. If Italy cries, Germany and France don’t smile… In September, French industrial production fell, with a widespread decline across categories. While German industrial orders dropped, but real turnover edged up, suggesting that easing bottlenecks and large backlogs will soften the immediate impact on output from lower orders. https://blinktrades.com/final-pmis-confirm-eurozone-growth-is-losing-steam/

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Eurozone Q3 GDP was resilient but a recession is imminent National GDP data released for Q3 show that Eurozone activity has slowed markedly from what seen in the summer. However, data released so far were on aggregate a touch better than what Oxford Economics’ analysts had expected. French and Spanish GDP increased by 0.2% over the quarter, while German GDP was up 0.3%. This means that eurozone GDP, to be released on Monday alongside the Italian number, could end up a touch better than expected. Broadly flat or slightly positive over the quarter versus a small decline pencilled into our latest forecast. Analysts still forecast a recession will begin in Q4 With high-frequency data in negative territory, it is a matter of how deep the recession will be and not if there will be one. In October, the Economic Sentiment Indicator declined to its lowest level since end of 2020. This poor sentiment was echoed in other surveys, such as the flash PMIs released on Monday. The Eurozone’s composite PMI fell to 47.1 in October, which, excluding the worst months of the coronavirus pandemic in early 2020, was the lowest reading since April 2013. Weakness was particularly acute in manufacturing Weakness was particularly acute in manufacturing with the manufacturing PMI falling 1.8pts to 46.6. Output in services fell as expected, standing at 48.2 in October from 48.8 in September. As high inflation dents real household incomes as higher operating costs force services firms to raise prices. This week we also received the results of the ECB’s Bank Lending Survey for Q4. In light of higher interest rates, a worsening economic outlook, and volatility in financial markets, banks reported strong tightening of lending standards, both for non-financial companies and households. The demand side of the equation was a bit more mixed, but was particularly worrying for the housing market. While average loan demand for companies was reported to have increased over the quarter, loan demand to households dropped. The situation looked particularly bad in Germany, with more than two-thirds of banks reported falling net demand for loans (down from just 4% in the previous quarter). The falls in other major Eurozone economies were notable as well.

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