Bannockburn Global Forex Drivers for the Month Ahead April 30, 2023 View Online Economic Calendar May 1: Labor Day, Europe and China markets closed May 2: Reserve Bank of Australia meeting, China markets closed May 3: Federal Reserve meeting, Brazil’s central bank meeting, China and Japanese markets closed May 4: European Central Bank meeting Norway’s central bank meeting, Australia monetary policy statement, China’s Caixin PMI, Japan markets closed May 4: UK local elections May 5: US and Canadian employment, Japan markets closed May 8: UK Bank holiday May 9: Mexico CPI, Australia Budget May 10: US CPI, China CPI and PPI, Poland central bank May 11: Bank of England meeting, Q1 UK GDP, OPEC monthly oil report May 14: Turkey Election May 15: China one-year medium-term lending facility rate May 16: Eurozone Q1 GDP, UK employment report, Canada CPI May 16-17: EU Summit May 18: Mexico central bank meeting, Australia labor market May 18: Northern Ireland local elections May 19: Japan CPI, May 19-21: G7 Summit May 21: Greece parliament election May 22: Canada holiday May 23: Reserve Bank New Zealand meeting, flash PMI May 24: UK CPI May 25: Tokyo CPI May 26: US Personal Consumption and Personal Income, Mexico Q1 GDP May 29: US holiday, UK holiday May 30: Australia CPI May 2023 May will feature likely rate hikes by the Federal Reserve, the European Central Bank, and the Bank of England. The banking stress that erupted in March appears contained, though one regional bank's dramatic loss of deposits saw it rekindle at the end of April. What makes the May rate hikes important is that the derivatives markets are confident (again) this is the last hike for the Fed. The swaps market anticipates two more hikes from the BOE and the ECB. Headline CPI in the UK has been above 10% for seven consecutive months through March. The ECB, which was slower than the others to initiate the tightening cycle, is understood not to be quite finished either. Before the bank stress emerged, the market had priced in a peak Fed funds rate of nearly 5.75%. Now, the May hike to 5.25% is expected to be the top. Similarly, the swaps market had the ECB's target rate rising to 4.0% by the end of September, and now it sees the peak between 3.50% and 3.75%. The market thought the Bank of England's base rate would top between 4.75% and 5.0% in Q4 22. After pulling back to 4% in late March, the swaps market finished April back near its pre-stress levels. We suspect the market is under-appreciating the risk of a Fed hike after May. Indeed, the futures market has moved dramatically in the other direction, pricing in a cut in Q3 and for the year-end rate to be about 4.50%. That implies 75 bp in cuts over five FOMC meetings that remain after this month., which seems unreasonably aggressive. It would likely take more than a quarterly contraction to deter the Fed. It would imply some kind of shock. The economy was contracting when the Fed began the tightening cycle. Click here for further currency analysis Bannockburn's World Currency Index, a GDP-weighted index of the 12 largest economies, eased slightly (~0.1%) in April after rising 1% in March. It has been alternating between monthly gains and losses this year. It traded quietly in April between roughly 96.40 and 97.05. Year-to-date, it is up almost 0.5%. Leaving aside the dollar itself, seven of the remaining 11 currencies were +/- more than 1%. Sterling was the strongest, with a little more than a 1.8% gain. It reached its best level since last June at the end of April ($1.2585). After hitting its record low near $1.03 in the turmoil last September, sterling recovered to nearly $1.2450 in the middle of December. The euro was second, rising 1.6% last month. It approached $1.1100 in the last week of April, its highest level since last April. It first breached the $1.10-level in early February and has been chiefly in a four-cent range in the three months through April. After hitting its record low near $1.03 in the turmoil last September, sterling had recovered to nearly $1.2450 in the middle of December. The Brazilian real was the only other currency in the index that rose by more than 1%. Outside of the Russian rouble, which fell by 3.1% as sanctions bit and the external balance deteriorated, the yen and the South Korean won were the weakest performers in the index, shedding about 2.5% and 2.7%, respectively. Around half of the yen's losses were recorded on the last trading day in April after the Bank of Japan left policy unchanged. There was no strong sense of urgency, though stronger than expected, Tokyo April CPI was disconcerting. The deterioration of South Korea's external balance and low policy rate (3.5%) weighed on the won. Four currencies in the index (the Canadian dollar, Chinese yuan, Indian rupee, and Mexico peso) were little changed (+/- 0.5%).